Hochschild Mining plc (HOC) Earnings Call Transcript & Summary

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

Thank you very much, Simon. Good afternoon, everyone, and thank you for joining us for our 2020 full year results. I'm Ignacio Bustamante, the CEO; and with me is Ramón Barua, our CFO; and we also have Charlie Gordon, our Head of Investor Relations. So if we move to Page 3 of the presentation, titled Key highlights, please. We talk here about the key highlights of the release that we put together today. We ended up the year with very strong financials despite the severe impact of the COVID-19 in terms of stoppages, among other things. But however, we have continued prioritizing employee health above business continuity. We ended up the year with strong revenues of $622 million, all-in sustaining cash cost at $12.8 per ounce, which is below -- way below our revised 2020 guidance and adjusted EBITDA of $271 million, very strong cash balance of $232 million and a year-end net cash position for the first time in 8 years, and the net cash position was of around $22 million. Based on this strong financial results and financial position, we decided to declare a final dividend of $2.335, which is equivalent to $12 million, which makes the total for the year at $33 million. The 2020 brownfield program was completed at only at 75%. We still have some additional part of that program left that we're going to continue into 2021, and we have budgeted an additional $34 million for our brownfield plan for 2021 and we have a very attractive portfolio optionality in our early-stage projects and the Biolantanidos development project that we're going to be talking later on during the presentation. If we move to the next slide. As you know, COVID-19 hit severely the entire world and Peru in particular, we decided to prioritize the health of our employees first, over business continuity, and we proceeded accordingly. We launched communication campaigns since the first Peruvian virus cases occurred. We put in place strict health and distancing protocols, protocols that were much more strict than those required by law, and we implemented those at all our mines, both in Peru and in Argentina. We assembled full medical teams that were in place at all the operations with also additional equipment acquired. We also provided additional community health and educational support and provided significant donations to help the community cope with this severe situation. We also launched a very interesting program that connected 14 communities to the Internet, helping them also to deal better in terms of communication, education and health-related matters as well. We launched an IT based system developed to monitor the progress of COVID cases and also to help us for all the -- to make more efficient all our shift changes. And the focus for 2021 will be to continue maintaining this strict COVID-19 protocols, reinforce our medical equipment and personnel. We are going to continue using antigen tests prior to anybody going to our operations, continue maintaining mental and health support for all our employees and families. We will continue enforcing relationships with local medical facilities and also be ready to respond to potential opportunities to vaccinate our personal and company personnel and communities once that possibility appears. Moving to the next slide, Slide #5, we talk about our 2020 ESG performance. We start with the chart on the upper left, which shows our frequency rate. You can see how in light blue, our frequency rate continues very close to historical lows and we have also included in green, a new metric that we have started monitoring in the past 4 years, which is the High Potential Event. So the frequency of High Potential Events, the High Potential Events are those that could end up being severe accidents or end up in a fatality. And you can see also the positive trend in that indicator that we feel very, very motivated with that. Regardless of the progress that we're making on safety, we launched our Safety 2.0 program. We will continue keeping this top of mind for all our employees and continue reinforcing all the things that remain to be completed to make sure that the culture of our people gets transformed and it takes into account the best possible safety practices all over the world. And finally, we're working to develop an equivalent of our ECO score that we developed for environment. We are planning on doing something similar to be launched soon. So far, it's called the SEGU score and the goal is to -- in addition to monitoring frequency and high potential events, also to monitor things such as audits, inspections, fines, et cetera, to make a very comprehensive single indicator that we can compare over time, compare with our other mining units and, hopefully, it help other companies adopt the same standards, so we can compare it also with other companies and monitor progress. If you look at the chart on the bottom left, you'll see our performance on our ECO score, you're going to see that in 2020, we obtained another very strong performance, which achieved our record with a score of 5.74 out of 6. It's the highest score since we incorporated this metric. Inmaculada obtained a very, very positive 5.88. And this ECO score, it's important to mention that we just won the Sustainable Development Award, which is awarded by the Peruvian National Mining Association, something that makes us also feel very proud. And also, we have decided that we want to have these ECO scores audited, and we have appointed E&Y to monitor this ECO score on an annual basis. Moving to the next slide. I'll pass the presentation over to Ramón Barúa, our CFO, who is going to give you some detail on the 2020 full year results.

Thank you, Ignacio. Hello to everyone in the call, and thank you for joining. In Slide #7, we have a summary of our P&L for the year. I would say, very strong results despite a very difficult COVID year, as you all very well know. So starting with revenue, you know that we had a much lower volumes in 2020 compared to 2019. Part of that was definitely expected. In 2019, we produced 38.7 million equivalent silver ounces, while the original guidance for 2020 was only 36 million ounces. However, as we started the year and the pandemic hit Peru, Argentina, along with the rest of the world, towards the half of the year, we needed to review our guidance, and we set a new goal of producing 24 million to 25 million ounces of silver equivalent. We ended up the year producing 24.9, so very high on the upper end of the range that we provided the market. However, despite having those much lower sales, precious metal prices did help us a lot. In the case of silver, for example, the average price, realized price in 2019 was $16.5, while in 2020, we received $22.3, an increase of 35%. In the case of gold, in 2019, the average realized price was $1,414, while the received price in 2020 was $1,814, so an increase of 28% in the case of gold. Under those parameters, you can see in the table that we achieved a gross profit of $224 million, which doesn't compare too bad with the $243 million that we generated in 2019 and these times, despite the fact that we had to recognize in 2020, $46.5 million of operational fixed costs that are directly associated to the stoppage, and which I will explain in the coming slides. Admin expenses were also lower. There were several savings initiatives launched by management. More things just fell naturally, like travel expenses and things like that, that were not possible during the pandemic. Selling expenses were also much lower. The main item behind that line is the export taxes in Argentina, so saving less in Argentina immediately reduces that number. Exploration at $32.8 million. Our original budget and guidance was a little bit higher than that. Ignacio mentioned that we had executed in 2020, approximately 75% of our exploration program, tilted towards the second half of the year, and we have certainly continued with a plan in early 2021, and Ignacio will later update you on that front. Others basically include -- we had a substantial increase in mine closure provisions as we continue to review those provisions on a yearly basis, and that includes also cost of current maintenance in some of our idle plants. Strong operating income at $107.8 million and net profit of $36.2 million attributable to our shareholders, $32 million and earnings per share of $0.06. This table reflects only our pre-exceptional expenses -- sorry, our pre-exceptional results. There are 2 items that we have booked as exceptional for the year. The first one is our costs that are related to initiatives that we launched as a company in 2020 to deal with COVID. Again, in the following slide, I'll give you more details on those and also reversal of impairment of our asset in San Jose, mainly as a result of the higher gold and silver prices and the stability of our resources. Those amounts are $31.2 million for the COVID response initiatives and $8.3 million for the reversal of impairment in San Jose. So we closed the year with an EBITDA of $270.9 million, a strong cash generation, again, highly supported by the higher gold and silver prices through the year and the management initiatives to deal with a difficult COVID year. Moving to the next slide. You have a couple of tables on the left that show the 2 main impacts that COVID had in 2020. On the first chart on the top left, what we reflect is the fact that despite having to stop operations, we were able to continue to pay full salaries to all of our employees and workers in the organization, despite the plants and a lot of our facilities being stopped. Those amounts, together with certain third-party services that we needed to continue to pay, being for the current maintenance of the operations and other contracted agreements that we had that we need to continue to honor, we incurred $46.5 million of expenses that, again, are included within the cost of sales on a pre-exceptional basis. In addition to that, there were other initiatives that we needed to perform in order to deal with COVID. Primarily, we needed to test our employees, in many cases, several times before they could reach our operations. Once we started, we had to quarantine the workers on their way up to the mines as we performed the original molecular tests required for 3 days to wait for results. Additional transportation costs, donations that we incurred to help the countries in which we operate. All of those initiatives amounted to $31.2 million, and they were booked again as exceptional items. We thought also that it was important to you to guide you in terms of what we expect as an outlook for this year for 2021, and we believe that those 2 figures are very far from being repeated. On the one hand, although in the case of Peru and Argentina, we are under a second wave of contagion, the government has not taken measures as radical as they did during the first wave, and we do not expect to be mandated to close our operations as we had earlier last year. Also, during 2020, we have learned a lot about our employees, their location, their means to get to the operations. We've developed software tool that allow us to track the movement and the status of every single worker in the company. We, of course, I mean, have much more effective, quicker methods of testing and we're getting ready also to receive the vaccine, hopefully, sometime during 2021. So putting all of that together, we believe that the number for this year is going to fall between $10 million and $15 million, is unlikely that it will be considered again as an exceptional item, so expect a number within that range to appear for the end of 2021 in our results. The next slide, on Page 9, is a cascade where we show the balance sheet, the cash evolution that we had during 2020. This is a slide that I like very much because it tells a very good story of what has happened during the year. So we started 2019 -- sorry, 2020 with $166 million in cash, and we can see then that our 3 operations did generate very strong cash flows, Inmaculada $153 million, Pallancata $38 million and San Jose $90 million. These numbers are presented net of their capital expenditures or the capital expenditures incurred to operate them. After that, we did invest $34 million in brownfield and greenfield, and we had $42 million of admin costs. After the operating line, what we had is net loans in Argentina of $10 million, you know that we did take $20 million during the year, but we repaid in December $10 million, so there's a net positive effect of them. We paid interest of $6 million, mainly associated to our $200 million facility. We paid taxes of $22 million. The stoppage cost that I mentioned in the slide before, $45 million, dividends of $21 million paid on the 31st of December of 2020. The money invested in BioLantanidos to bring the feasibility study forward. COVID response of $31 million also explained in the slide before. Mine closure and current maintenance payments, as I mentioned earlier also, these are amounts that we are proactively spending in order to reduce our mine closure provision for when the mines are finally closed. Costs associated to FX transactions in Argentina. There is a very high cost of acquiring dollars in the country. Working capital net positive of $12 million, basically associated to products in process that were consumed during the year as a result of having our plants stopped. And then as we run them up, we consumed part of our stockpiles as well primarily in Inmaculada. Others of only $1 million, so you can see that explanations that we have throughout are very complete when others comes in such a low number. So we closed the year with $232 million, again, a strong cash generation in a difficult year. The next slide, in terms of costs, we had costs in 2019 of $11.5 per silver equivalent ounce. We had expected for the year, that cost to go up to $14 to $14.5. That's the revised guidance for the year. We expected cost to go up, as you may recall, basically because we had to start building a tailings damming Inmaculada, also prepare mine infrastructure to access the Millet and Olinda areas in Inmaculada and we expected lower grades in Inmaculada as we transition from 100% production coming from the Angela vein to having production coming from other veins as well and lower grades in Pallancata. So there was an expectation that the unit cost was going to go up. However, we ended up the year with an all in sustaining cost of only $12.8 per silver equivalent pounds as a result, mainly of having to delay some of the CapEx into access easier areas within the mine and as we try to use more mechanized -- a higher percentage of mechanized methods due to the restriction and unavailability of personnel in the operations. Going to the following slide, Slide 11. On the left of the slide, we have a summary of our CapEx. Again, the CapEx is lower than expected, than guided, and lower than 2019. It has to do also with mainly lower CapEx execution and lower exploration associated with the COVID restrictions. And exploration on the right, as Ignacio mentioned, we're very close to spending around 75% of the campaigns that we had estimated, except in the case of San Jose, where we were able to make significant progress, and as I mentioned, most of the campaign is finishing as we speak in a lot of our operations in 2021. Going to the final slide in the finance section, Slide #12, Ignacio did mention this in the highlights are much awaited and much expected turn from a net debt into a net cash position for the company of $22 million. The chart on the left is quite impressive, and we've come down from a quite leverage situation into a positive cash position, which is very important for our growth strategy. The debt that continues to be in the company is in the form of -- mainly is in the form of a financial facility that had 5 years' maturity. We will not pay any principal in 2021, we will start paying principal in 2022 and until 2024. The interest rate, we swapped into fix that LIBOR plus 115 that we had early in 2020 to around 2% fixed rate, but the cost of that debt is really, really very low. So having completed and being able to navigate a difficult year successfully, we did pay $21 million of dividends, again, in December of last year. We had to withdraw a dividend of $12 million at the beginning of 2020 because of the uncertainty associated to COVID. We are happy to announce that we're going to reinstate that dividend, bringing the overall dividend payment for 2020 to $33 million. With that, I'll pass the presentation back to Ignacio. And if you have any questions, we'll take them at the end of the presentation. Thank you.

Thank you very much, Ramón. So if we go straight to Slide 14 of the presentation, titled operational update. So all of our mines are currently operating normally, we have shown a very strong recovery despite all the COVID related stoppages. The 2020 revised production and cost targets were achieved, actually, in the case of the cost even significantly better, as Ramón just explained. And we maintain -- we are maintaining our guidance for 2021, which is a production of between 31 million to 32 million ounces in silver equivalent ounces or between 360,000 and 372,000 ounces in the case of gold equivalent. Our all in sustaining cash costs are guided at between $14.1 and $14.5 in the case of silver and between $1,210 and $1,250 per ounce of gold. Here, I also would like to mention that we have done some minor hedges with the goal of securing the production at Pallancata for 2021 and 2022. Let me stop here for 1 minute. In the case of Pallancata, as you may recall, Pallancata is an operation that is showing a lot of long-term potential for resources in the Corina, Palca and Cochaloma areas. However, the short-term is facing challenges. We have a drilling campaign in place to come up with short-term resources, but those results, and we'll discuss those later on, those results are still not there. So we saw this opportunity to hedge 4 million ounces in 2021 and 2022, 4 million each year at an average of $27 per ounce, and that is going to allow us to produce profitably at Pallancata in 2021 and 2022, with the goal of giving an additional year of time to our brownfield team to come up with additional resources in the actual operations area that could catch up, by so -- to the time in which the potential new resources in Corina, Palca and Cochaloma may come to our production profile. So it's a move that has been done to protect the cash flows and ensure production for Pallancata in 2021 and in 2022. Other than that, we continue to be very bullish for both gold and silver, but we thought this was a good opportunity to generate that optionality in Pallancata as well. In the case of CapEx, we continue guiding between $120 million and $130 million. The brownfield exploration is guided at $34 million for the full 2021 and the greenfield exploration budget is similar to last year at $11 million. We also have a budget for BioLantanidos of $14 million, with the goal of completing the feasibility study and doing some additional geological work during 2021. And finally, we have just approved a $7 million investment in an ore sorting pilot plant in Inmaculada. I will talk a little bit about that further during the presentation. If we move to the next slide, Slide 15. You can see here the evolution of our resources in 2020 versus 2019. Let's start with Inmaculada. In Inmaculada, we added until the drilling campaign of 2020, 18.9 million, so let's say, 19 million additional ounces of resources. However, as we said, we didn't have enough time to complete the campaign in the year because of the COVID-related stoppages. So in the first few weeks of the year, we have been able to add an additional 8.1 million ounces in January, which were part of the initial brownfield drilling campaign in -- for 2020. So in total, I would say, for the 2020 drilling campaign, we have added about 27 million ounces in Inmaculada. In the case of San Jose, we have added 8.4, but also we have had some benefits by additional drilling that are represented there as a cut-off geology. So we have been able to maintain the same levels of resources. And in the case of Pallancata, we have not had success so far, so we have had no resources additions but still many targets remain in place, and we'll see later on. Moving to the next slide, Slide 16, on reserves. You can see also starting with Inmaculada in the upper left. In Inmaculada, we have been able to add 25.3 million ounces in reserves, plus an additional 1.5 million ounces as a cut-off geology and also unaudited, but we have already added an additional 2.4 million ounces in the first couple of weeks of January as well. So we are making good progress into increasing our reserve life of mining in Inmaculada, and we'll continue doing so during 2021. In the case of San Jose, we converted it between additions and cut-off geology of about 8.4 million additional reserves, which is below what was produced, but also with many additional targets that we can continue pushing for additional reserve growth into 2021. And in Pallancata, basically, we didn't add too many resources, either for the reasons that I just talked, and we'll talk later on about the different possibilities that we are evaluating in Pallancata. Going to Slide 17, growth strategy. We have changed the format, but the concept remains the same. So we have 4 pillars for our growth strategy. We have brownfield, greenfield, early-stage projects and strategic alliances. Brownfield continues being our top priority, our key pillar and where we believe we can generate the most value. We are targeting to continue increasing our life of mine to continue improving the quality of the resources and ideally using the spare capacity that we have available. In the case of greenfield, we continue working hard to streamline our portfolio, staking properties that are attractive and to progress in all the projects that are drill-ready, with the goal of drilling between 4 and 6 projects per year in 2 to 3 different countries. The third pillar is early-stage projects, and then we are going to continue optimizing our early-stage projects, such as Crespo, Azuca, Baculo and Volcan in Chile. We are working both on the technical side and on the exploration front. So we're going to continue pushing both fronts to try to put these early-stage projects into value and also advancing the BioLantanidos that we'll give a status update later on during the presentation as well. And finally, strategic alliances that could be acquisitions or could be joint ventures as long as they meet our criteria that whatever we acquire needs to be early stage, significant geological potential, highly value-accretive to our shareholders, and we need to acquire control. Moving to the next slide, getting into the brownfield, Slide #18. So you can see here the map of the properties, operations and projects that we have in Peru. We have on the West side, everything related to Inmaculada, Pallancata, Corina, Selene, et cetera. And on the right, we have Azuca, Crespo, Arcata, Ares and Condor. So for 2021, we have another very aggressive drilling program, $34 million in brownfield, and we're going to continue looking for additional resources in Inmaculada, in Pallancata, and Pallancata comprises also Cochaloma, Palca and Corina, in addition to Pallancata, of course. On the East side, we're going to continue doing geological work in Crespo, in Arcata that, as you know, have shown some promising intercepts in the third and fourth quartiles of the map. We are going to continue doing geological work in Ares and we're going to continue doing geological work in Condor as well. And obviously, in Argentina, that is not part of this map, but also continue showing very attractive targets. Moving to the next slide, Slide 19. Inmaculada, as you know, is a very young district, vein district with potential to incorporate further new resources. Last year, we have been restricted to a certain area, the only area left that we had permitted and regardless, we have managed to find an additional 27 million ounces of resources there. The drilling has focused on Shakira, Juliana, Angela North and some other minor veins around the main Angela vein. For 2021, we have a program of 35,000 meters that is going to focus on Angela North to continue the work that we started in 2020 and also in Lineamiento trace, which appears in the map in the north -- center north of the map highlighted and also in Minascucho, which is on the center West. So we are also highly encouraged with the potential of those areas, and we're going to start drilling them as soon as we have the permits. Angela North is already fully permitted. So we are right now doing all the drilling work, and especially in Lineamiento trace and Minascucho, are going to get permitted in the upcoming months with a goal of drilling both areas before the end of the year. Moving to the next slide, Slide 20. We, as I mentioned, have just approved a budget for this ore sorting pilot plant in Inmaculada. The total budget approved is $7 million. The project is set to complete towards the end of 2021. We are very enthusiastic about the potential of this plant. The goal is to improve recoveries to help us increase the size of the capacity of the Inmaculada plant and also to improve the economics of our near-term projects. It should also allow us for more mechanization, should allow us to focus on areas that may not be profitable now, but after ore sorting may be profitable and also evaluate other potential projects that would benefit from this technology. In the initial stage, we are seeing some very encouraging results. We're seeing in the areas that are -- that go through this sorting plant, the volume could get reduced by 26%. Risk would go up by about 17%, and that's also in the initial screening stages when we believe there's significant upside to continue improving the screening technology and get even better results. So we're highly enthusiastic about this ore sorting plant. It's called a pilot plant. Now the size, it's not that small. It has a capacity of about 1,080 tonnes per day, which is about roughly 30% of the capacity of the Inmaculada plant. Also it's a good-sized plant and of course, if we get the results that we're expecting, it has the potential to be increased materially. Moving to the next slide, Pallancata exploration. As you know, Pallancata is our asset with the shortest life of mine, and we have the strategy of finding economic ounces close to current operations in addition to working at the long-term targets. The 2020 surface reading intersected structures, but without the economic value, nothing really that could be a game changer yet. However, good targets remain for 2021 and you have them in the mapped numbers, you have in the center West, Pablo South, which is underway. You have a little bit to the north of that, in #2, Pablo Piso, to the west of that, we have Pablo extension. In the center of the map, we have Pallancata Central, which we're going to be focusing on the Paola, Falia and Luisa structures. And also, we have San Cayetano to the center east of the map. So we're going to continue pushing those targets. 2021 is going to be a very important year to continue trying to materialize new short-term resources for Pallancata. And at the same time in parallel, we continue working to add long-term resources from other -- the more regional projects that would be processed or could be processing the Sabina plant that are Corina, Cochaloma and Palca. Moving to the next slide, Slide 22. In Palca, the drilling has started, as you know, we have found resources at the Escondida vein, so the drilling will continue to add inferred resources there. And you see that's in the chart on the right, is in the bottom right corner, you can see there the Escondida target. And in addition to that, we are going to drill other potential new structures more in the center, in colors, green and red in the center of the chart on the right, that are called Santa Beatriz, Roxana, and Santa Marta range. So those are going to be Escondida, and these 3 targets are going to be the key objectives for 2021. In Cochaloma, we have already started drilling, targeting the Esperanza vein and Cochaloma, and we are expecting to finish the program by April of 2021. So also those 2 targets are continue very, very encouraging. However, the most encouraging one is Corina so far, which is in Page 23. You can see there in Corina, it's also a low sulphidation epithermal gold/silver deposit. It's very close to the Selene plant, which is the plant that processes the Pallancata material. Between 2019 and 2020, we have obtained very attractive drillings that you can see there in the table, and our resource team has already prepared a maiden resource that is giving us in this initial drilling campaign, a total of about 9 million ounces with about 330 silver equivalent grams and a very, very thick structure of 12.4 meters. So we're highly encouraged with these results. As you can see in the chart below, the area that we have drilled is the area that appears in the center East, which is in green, and that area is just a tiny part of the entire Corina structure. You can see there how we have Corina West and Corina East on both sides of that area that we are going to continue drilling. And also, we're going to be focusing on Corina East, Calvario, Clara, and Karin areas that are right underneath that Corina central area that we just drilled. So also, we have high expectations with Corina and hopefully, we can continue increasing the resource getting into 2021. Moving to the next slide, Slide #24 with San Jose, in San Jose, we're also active drilling. We drilled the San Jose vein extensions in the operational area, and we also drilled Saavedra West, Telken and Rosalia. The key results came from the San Jose veins and Saavedra West. We actually found a very interesting structure there that is called Betania that gave us a true width of about 10 meters with 7.5 grams of gold and 40 grams of silver. So looking also very encouraging. And we still need to understand that system better, but it's giving us good indications for potential mineralization in that area, Saavedra, which is to the southeast of the San Jose. The focus for 2021 is going to continue being in the operational area, with high-grade areas close to the current mine, such as Saavedra and Rosalia veins. Saavedra East that I just mentioned in the Betania vein. Also Titan target, a target that was identified via Titan Technology to the southwest of San Jose. And we're going to continue exploring Telken area, which is the potential continuation of the Cerro Negro veins into our deposit Telken as well as Aguas Vivas area to the northwest of the deposit. Moving to the next slide, Slide 25. In addition to this potential brownfield that we have in all our operations, we also have other attractive opportunities that we're planning on targeting to delivering value as well into 2021. In the case of Peru, we have Arcata that is looking also very encouraging. We have obtained 2 positive results in 2 new structures in quarter 3 and 4. So we are treating as much as we can in that area. Unfortunately, they are very long drill holes, somewhere about -- between 700 to 800 meters. So it takes some time, but we are excited with the results that we have seen so far. Same with Crespo, Crespo still has many geological opportunities that we're going to be pursuing in 2021. Same with Ares, Corina that I just mentioned now. Azuca Huacullo, in Azuca we have many ounces, but they are still not to the point that they could be profitable, although looking much better at current silver prices, but what we're trying to do is we're trying to see if we can materially improve the grades of the deposit and put it into value. So we have a target right next to Azuca Huacullo that we are about to drill once the rainy season is over in around the month of April. And also we have many targets in the Sabina area but look more to be targets for 2022 based on the permitting situation. We are also pursuing greenfield opportunities in Peru with Condor, Pampamali, Ballanero and Corvinon in 2021. In Chile, we have, as you know, our Volcan project, 9 million ounces of gold in the Maricunga area that we also continue progressing it and understanding it more from a technological and geological standpoints. In the case of Canada, we have this option to acquire 60% of this Snip project, part of the Skeena resources. The company announced a maiden resource in July that indicates roughly 650,000 ounces with an average grade of 13 to 14 grams of gold. So it's looking very encouraging. The company completed a 2020 drilling campaign with 16 drill holes and we're waiting for the results to see if they can have a positive impact in the resource as well. In the U.S., we also have the greenfield projects, such as Illipah and Adamera, that we're going to be drilling in 2021. And in Mexico, we have another one that is called Sarape. So plenty of opportunities in addition to our brownfield potential that we want to pursue in 2021 as well. Moving to the next slide, we talk about BioLantanidos, and I would like to call Ramon to comment on the next couple of slides before I do -- I close with the conclusions. Thank you, Ramon.

Thank you, Igancio. So in BioLantanidos, just as a reminder, we are super excited about this deposit is quite unique. When you think about the competitive advantage that the Chinese have in the rare earth market is not necessarily because they have lower labor or lower energy costs or anything like that. The source of the advantage comes from having the right type of deposit and what they have is this iron absorption clays, which is exactly what we have found in the south of Chile. So this is, again, a very unique deposit. And the main characteristics are that it contains the much coveted heavy rare earths, especially dysprosium and terbium, which make for a round of 65% of the value of the basket that we will be selling. Neodymium and praseodymium, the other elements that have a permanent magnetic properties, account for another roughly 20% of the value of the basket. So 85% of the basket value is made out of this 4 very coveted elements because they have a direct application in the motors of the electric vehicles, in drones, in the motors of the all turbines, et cetera, et cetera. The other super interesting feature is that the contents of radioactivity in this deposit are absolutely negligible. So when you compare them to other deposits in the world that have to deal with such constraint, it makes it very special. And finally, the cost of extraction due to the simplicity of the metallurgy and the simplicity of mining, make it a very cost-efficient source of rare earth. So when you combine all these 3 elements, the value of the basket and the contents of heavy rare earths, the cleanliness of the mineral and the cost effectiveness of production, BioLantanidos is in a prime position in the world to become a major source of these rare elements. The CapEx is also going to start being very, very low because this is a deposit that will be developed in modules. Again, the deposits are relatively shallow. They are not too deep. So you require a lot of surface. This deposit is sitting in areas in Chile, where typically the surface has been used for forestry purposes. So from an environmental standpoint, they have been already affected. So the a -- so the -- again, the environmental impact overall is very, very limited. There is no use of any hazardous material or chemicals in the process, again, making the overall metallurgy of these deposits, super simple and friendly. Again, this deposit is sitting in Chile, which is a world-class renowned mining investment jurisdiction. So we expect to develop this deposit as quickly and as efficiently as possible. We have put together a management team in Chile already. They are developing the asset based on full-time work, we're not using employees of Hochschild to move the product forward, and that makes it also very special. In 2021, we expect to finish the metallurgical optimization, although, again, the technology does exist in China, they do not share it with the rest of the world. So we are trying to fully develop our own metallurgical flow. We're doing that with the help of very renowned experts in Canada, in Australia, in Peru and in Chile, the environmental permitting also continues to move along. Our expectation is to receive the environmental impact study at the end of 2021. We are doing equipment testing. We are using different sources or different companies as suppliers right now, and we're trying all of their equipment. The equipment is not too complicated. It's essentially tanks, agitators and simple things of the like. And we're working also in brownfield. We have made a lot of progress in adding new resources to the ones that we purchased in -- at the end of 2019. That's good news and also an added difficulty because we are finding that clays that were originally thought to be waste, they do contain significant amounts, especially of the heavy rare earths, but they have a slightly different metallurgical behavior. So we're trying to pass all those tests completed in order to feed a feasibility study that should be ready towards the end of H1 2021. We had a more aggressive deadline for that feasibility at the outset, but we've moved it a few months, basically because this discovery of the new clays. And also, although in the first wave of COVID, we had no employees affected, in the second wave, we've had several of our key personnel and their families affected by COVID. So we are experiencing some minor delays. Ausenco is leading this work, and we hope to share with you those results as quickly as we have them. In the following slide, I'm not going to go into all the detail on the slide. But this is data that was compiled from FactSet in order to make it standard for all the companies in evaluation. And as you can see, Hochschild is trading at a significant discount to its peers, all the primarily silver producers, not only in the U.K., but also in North America. With that, Ignacio, I'll return the presentation back to you.

Thank you, Ramón. So if we go to the last slide of the presentation, Page #28. And as a conclusion, so we finished the year with a very strong performance despite the material COVID stoppages. We achieved all our revised production and cost targets even better in the cost front than what was guided, significant free cash flow generation, and we ended up with a net cash position the first time in 8 years. We declared -- we paid $21 million interim dividend in December, and we have just announced a further $12 million final dividend. We have a very important significant 2021 brownfield program is scheduled for the year with $34 million in budget. As Ramon just mentioned, we have a very exciting BioLantanidos rare earth project that is close to feasibility stage. We continue having a very attractive optionality in greenfield in early-stage projects and in our M&A strategy and, obviously, the opportunity to generate substantial shareholder return. So with this, we finish the presentation, and let me open it up to any questions that you may have.

[Operator Instructions] We'll now move to our first question over the phone, which comes from Izak Rossouw from Barclays.

I had a few questions, maybe just to start on the exploration program. Do you mind just sort of giving a bit more details on the program in 2020? I mean you had pretty strong confidence that you could complete that in 2020 and so maybe just give an idea of what went wrong? And I guess, just what the risks are for this year in your program. And maybe just to check that the exploration, I guess, carry over into 2021 from 2020, is that all included in the $34 million guidance for brownfields exploration? I'll take one by one. If you want to comment on that.

Sure. Yes. Thank you very much. Yes, short answer is yes. The initial value of $34 million that we have includes the remaining part of the plan for 2020 -- for 2020. Having said that, obviously, if we have success, that budget could increase, but I would say that the money is very well spent because it's to build on something that is looking good. So where we believe it went wrong, I would say is, in general, we underestimated the potential delays that we're going to be having in COVID, not only on ourselves, but also on our people on the -- on our contracted machinery and certain contracted works. So that created some additional delays that were not expected that even though the COVID situation was under control on our front, it was not necessarily the same situation in our environment. So with that, we were able to complete 75% of the plan. And the idea will be to work full speed with the plan in 2021 that we have budgeted. Again, if the results are with us, we will continue with spending even more money. And so far, fortunately, things are going all as planned, and we see no potential impact in the short-term of additional COVID stoppages so far. The protocols that we have in place are working very well, and we have confidence that we are well prepared in case the situation gets even a little bit more complicated in the country.

Okay. And the sort of permitting you were mentioning at Inmaculada, there's a couple of permits that you expect in the next couple of months. If that's delayed, would that sort of impact exploration plans for this year? Any other...

I would say -- they would certainly impact the plans, but I would say there's still a lot we can do when we wait for those permits. So I would say the biggest success that we had in Inmaculada in 2020 was the discovery of this area that we call Angela North, that could be a potential continuation of the Angela vein. So that's something that was found at the end that's already within the permitted areas and we are already drilling that area as we speak. So we are going to go at full speed with all the permits in place between now and April or May of this year to come up with additional inferred resources in that area. And in addition to that, we are going to be doing some infill drilling also in those areas to try to convert more reserves. So that can go ahead even without additional permits. The permits that we're expecting are the permits for Minascucho and Huarmapata. In Minascucho and Huarmapata we are giving a little bit of a leeway, but we expect that they could be obtained somewhere between May and August of this year. So -- and things are moving along well, I would say. So we have confidence that we're going to be able to achieve the permits and complete all the plan that we have scheduled for Inmaculada for this year. In addition to that, in addition to those 2 permits, we're only waiting for the 2 final permits in Inmaculada that one should come, I would say, probably closer to November of this year and another one for early 2022 that will give us pretty much the capacity to drill everywhere in Inmaculada. There are going to be like 250 platforms coming to stream after those 2 last permits get approved. So with that, we should be in a great position to drill as much as we can in Inmaculada for the upcoming years.

Okay. And then just related to the reserve updates. You were mentioning last year the possibility to obviously increase your pricing assumptions within the reserve resources to, I guess, help Pallancata maybe extend the life by a year but it seems like you've done that at Inmaculada as well. So you've seen, I guess, across all operations, pretty sizable grade reductions. Is the intention to I guess, mine at those new reserve grades going forward at all the operations?

Yes. That's the intention, Ian. We always try to do as much as close as possible to mine the reserve grade. So that's the goal. Obviously, if prices change, that's going to have to change, but the idea is to maximize the life of mine by mining the reserve grade. Having said that, we continue looking at other opportunities that have the potential of containing higher grades and if they get materialized, the average rate should go up. But our goal is to always mine at average reserve rate.

And I mean, in terms of the pricing now, are you happy with those levels or there's a potential for those prices within the reserve resource models to increase further? It's just -- we saw this obviously at the previous cycle where companies were continuingly increasing their reserve and resource grades. And ultimately, the cost base followed the gold prices and silver prices up. So I'm just trying to get a sense of was this more just to help give time at Pallancata to extend the life by year until you find more resources? Or is there something you're looking to do every year?

Yes. We -- every year, we review our price assumptions. This year, we have a big increase following the big increase that we see in gold and silver prices. We're using 18 for gold and 20 for silver. Right now, we would say, gold seems to be fairly priced, silver seems to be a little bit low. And now that you mentioned Pallancata, as you can see in the resource base, we still have about 50 million ounces of resources in Pallancata that we have not managed to make them profitable yet. So we have the team completely focused on trying to see if there are more ounces that could be turning to reserves and be profitable with the current price situation. So we have also an ongoing work on that front to see if we can continue extending even more on the life of mine of Pallancata. Right now, we see production, profitable production, even more now with the hedges that we have made for 2021 and 2022. And ideally, we'd like to try to ensure at least a couple more years so that we have enough time for our long-term projects to catch up.

And maybe just one final question. Just on the exceptional costs, you guided, Ramon, of about $10 million to $15 million for this year. Just wanted to check, within the AISC guidance, you've assumed there's no other fixed costs that will be excluded from those costs as you've done in 2020. Is that correct?

That is correct, Ian.

Just to confirm Mr. Bustamante, there are no further questions queued over the phone at this time. And apologies, we'll now move back to Ian Rossouw from Barclays.

Okay. And just on the rehabilitation, I guess, cash flows, Ramon, over $14 million. Could you maybe just give an idea what you expect for the coming couple of years? And you talk about sort of, obviously, spending on mine closures. Are there any -- which mines are you referring to? Is that quite far out in the future?

Sure. Ian, no, these -- the recent increase in the mining provision that we had in 2020, there are $13 million that have to do directly with the Ares mine. The Ares mine is a mine that started its operation a long time ago. So the standards for mine closure -- not the standards for mine closure, the standards with which Ares was built several decades ago, was not as high as the standards that we require right now. So we put an effort to fully review those mine closure situation in all of our mines in 2020 and we decided that we needed to close more -- or to invest more in Ares to have a better rehabilitation. The rest of -- for the rest of our mines, no. Sorry, and given that, that was already closed, that amount needed to go directly through the P&L and not into the balance sheet. All the rest of the -- all the other provisions that we have are already in our provision in the balance sheet. I think the number is close to $135 million. Now what we try to do is we try to bring forward as many of that work as we can possibly, first, because we can take advantage of the tax shield of those expenditures throughout the years, and we also benefit of having full teams in the operations while we close this, and we don't have to maintain people in those operations exclusively just to close the activities. So as much as we can bring forward, we try to do it. The amounts are around probably in the range of $10 million to $12 million per year. We have been incurring that for the past several years already and it's a good policy for us. This year is higher, it's double that amount because of the Ares explanation that I just mentioned.

Okay. So you said 2021 will be double, so more like 20% to 24%?

No, no, no. What I said is 2020 is double. The number that you are looking in our P&L is around $25 million because that incurs that the typical $10 million to $12 million that we spend every year, plus the $13 million of Ares. But Ares should not be -- should not recur next year. So what you should expect is that $10 million to $12 million per year.

Okay. So that's on the P&L. But what about the $14 million in the cash flow balance waterfall? How much do you expect to spend on that this year?

Yes. Again, that number, that $14 million is mostly is $10 million to $12 million on ongoing activities in all of our operations. Plus, we have started to do the work in Ares as well. In Ares, we need to spend around $13 million, and that will come through the years, but it has to go -- or that increase in provision has to go all in -- not as cash flow, but all in ones, all at once through the P&L. The rest of the cash flow expenditures should go against the provision that we have in the balance sheet.

Okay. Okay. No, that's clear. And then just on the working capital release, you mentioned you were depleting or consuming some of the ore stockpiles at Inmaculada. Is there an expectation that you will build a bit of inventory or working capital this year to normal levels?

That's the idea. The idea is to build a little bit of more stockpiles. But as you can imagine, the situation with COVID continues to be relatively tight. So this is -- it's going to be a challenge. I wouldn't count on that, but the expectation is, yes, to continue to build a stockpile as protection for eventual stoppages like we had last year.

Okay. And just around for the payables, receivables, there's no big swings you expect for this year?

No, no, no payables, no receivables.

Okay. And then just lastly, on your hedges. Are these corporate hedges? Or do you -- were they taken out at Pallancata at the sort of operating level? I'm just trying to get a sense where we should expect these in the P&L?

Sure, corporate. Corporate meaning our subsidiary in Peru that has Pallancata and Inmaculada.

Okay. Okay. But these will just come through other income, I would imagine, the sort of realization of hedges, et cetera?

Yes, yes, because they are directly associated to production. So they have to come, yes, at that level. That's correct.

We now move to our next question over the phone, which comes from Camilla Jenkins a private investor.

It's just a quick one on the BioLantanidos project. I saw an article with Rodrigo Ceballos, the Chief Executive of the project. And he was just saying production could be at the end of 2022, early 2023. Is that kind of what you're looking at?

Sure [indiscernible] Yes.

I think it will be more accurate to I say -- sorry, this is Ramon. It will, Camilla, I think it will be more accurate to say beginning of 2023 is the best assumption.

It's kind of where you're looking. Yes.

Yes.

As there are no further questions queued over the phone at this time, gentlemen, I would like to turn the call back over to our speakers for any additional closing remarks.

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

Ladies and gentlemen, this does conclude today's call. Thank you very much for your participation. You may now disconnect.