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 Mr. Ignacio Bustamante, CEO. Please go ahead, sir.

Thank you, Simon. Good morning, and welcome to our conference call, which will cover the press release which we published this morning. As you have seen, we learned through the Peruvian media outlets on Friday of minutes of a meeting, signed by the Peruvian Head of Cabinet, certain vice ministers as well as regional authorities in the town of Coracora in the Ayacucho region. These minutes refer to alleged environmental complaints and state that our commission has been constituted in order to negotiate the timetable and terms for the closure of certain mining projects in Southern Ayacucho, including our Pallancata and Inmaculada mine. The Peruvian Head of Cabinet then indicated that approvals will no longer be granted to facilitate additional mining or exploration activities in relation to these mining operations. However, we have not received any formal communication from the government regarding this matter yet. We do believe that this conduct by the Peruvian Head of Cabinet is not in accordance with Peruvian law and is without merit. Naturally, you can expect that we will vigorously defend our position and take all actions necessary to ensure that the rights for our company and the wholly-owned subsidiaries under Peruvian and international law are respected. That's a short summary of what has happened today, but I would like to emphasize the following points. First of all is that this proposed action is without any merit and illegal. Hochschild believes that this unilateral action by the Prime Minister is holding without merit and unlawful, its stakeholders should be protected. Hochschild will vigorously defend its position and take all actions necessary to ensure that the company's rights, those of its employees and its stakeholders are protected. The second point is that Hochschild is wholly compliant and a best practice corporate citizen. Our sustainable operations are strictly regulated and supervised by several Peruvian regulatory bodies, and our activities remain in strict compliance with the requirements. We have received numerous external accolades for both our environmental performance and our contributors -- and our contribution to the communities in which we operate. We are -- the third point, we are committed to a long-term partnership with Peruvian stakeholders. We're a Peruvian company employing more than 5,000 people directly and approximately 40,000 people indirectly. We have a long-term investment plan to further develop our mining assets in Peru, which will continue to deliver significant benefits to the region and its communities. Fourth point is that we have significant support, and that support is coming from local communities and trade unions, major business groups, including the National Confederation of Private Businesses and the National Society of Mining, Energy & Oil. In addition to that, we have the support of international commerce group, 12 by National Chambers Of Commerce and Investment: Canadia-Peru Chamber of Commerce, the Peruvian-China Chamber of Commerce, the Swiss Chamber of Commerce, among others. They are expressing the deep concern and rejection of the recent announcement by the Head of the Cabinet. And finally, the fifth point is that we are seeking to engage constructively, and we are committed to constructively engaging with all parties to ensure the right and legal outcome. So with that, Simon, it's back to you. I would like to open up to any questions for our investors or from our research analysts.

[Operator Instructions] We'll now move to our first question over the phone, which comes from Jason Fairclough from Bank of America.

Look, 2 questions from me. First, quite a simple one. Will you be shutting the mines near term? Or do you continue to operate as normal? And two, have you actually had any demonstrations at either of your mining sites similar to what we've seen at Apumayo?

Jason, thank you for the calls. Regarding the first question is we will not be shutting down our operations now or in the short term. The message from the Prime Minister has been very unclear. And after her declarations in the meeting in Coracora, Ayacucho on Friday, she has been sort of trying to tone down the comments that were made. So we still have not received any kind of indication, any kind of legal response yet. All we know about this is something that is coming from social media and from the press, nothing directly communicated to us, but we have absolutely no instructions, whatsoever, that we need to stop our operations. So our intention is to continue operating. And regarding demonstrations, we have not had anything similar to the situations of violence that were experienced a few weeks ago regarding Apumayo and regarding Breapampa. We have got certain attempts or blockage short term in the past, but those have not any kind of relation with this situation and with the group of people that is protesting in this particular case against mining in the entire region of Ayacucho.

Sorry, Ignacio. This is Ramon. Sorry, Jason, in order to add to that, on the contrary, we have received messages, formal statements from 3 direct communities surrounding us, showing support to the company and rejecting any comments by the Prime Minister. So I would say if any demonstration has been supporting Hochschild.

Yes. And in addition to that, the 3 syndicates that comprise the workers of Inmaculada, of Pallancata and of Selene have sent a communicate, giving all the support to the company and protesting energically to the measures announced by the Head of the Cabinet...

So we have the support from our people, and we have the support from our communities.

Syndicates, meaning the workers' union -- the worker unions, sorry.

Yes. Understood. Yes. Very clear. Look, just a follow-up, if I could. So you used the word unilateral. And I guess, the question then is, is this the Prime Minister going off-piste? Or do you feel like her statements reflect the wider views of the government?

We do not know that yet, Jason, because we have heard from this, again, from social media, but something that is very important to clarify is that, as I was saying, after these declarations, the Prime Minister has been giving additional declarations to the press. And in those declarations, she has been saying that she is not planning on closing or rushing the close of the mine units in Peru because those mines are already in their closing period, which, as you can imagine, is not the reality. So in our view, the Head of Cabinet is either confused or misinformed regarding the situation of the mine closure plans in Peru. And something that is very important to emphasize is that -- and we need to understand is that the way that mine closure plan works in Peru is the following. So you start with a small area that you know, particularly in underground mining, you start with a small area that you know, and you get your mine plan for that. You get your approval. You get your permit. And associated with that permit, you have the mine closure plan. When you start exploiting the mineral and extracting the mineral, you continue doing exploration, and you continue expanding your resources, and you continue increasing your life of mine. So when you increase your life of mine, now you have a new life of mine, you get a new permit, and you modify your mine closure plan. And you do that continuously during the life of mine or the mining operation. So these mine closure plans are live documents, are dynamic documents that get updated as the mine -- life of the mine continues increasing and progressing over time. So what the Prime Minister answered in a communicate is that they were closing because they already have mine closure plans that finish in the next 1 or 2 years, which is not accurate. These are the mine closure plans that may be valid at this point in time, but we have already submitted the plans to increase that to adopt to and to adapt to the new resources that we have found, and that should continue ensuring the production of -- in the case of Inmaculada, for the next 20 years. So that message is a message that has been very confusing, and that has had also a lot of press attention. And yesterday, in the programs in the national TV, we had 2 very interesting declarations from both the Ministry of -- Vice Ministry of Energy and Mines and the Vice Ministry of Environment, which they both had denied that those mine closure dates that the Prime Minister refers to are exactly what she interpreted it to be the fact that we are already closing. They have been very straightforward claiming and portraying that these mine closure plans are dynamic, are live documents and are getting updated going forward. And they shouldn't be denied if the company complies with all the regulations and all the requirements. So we still need to see, Jason, to see what the reaction from the government is. But our request is that we would like the Prime Minister to rectify her position and clarify that -- what the actions are going to be involved in this that do not imply any kind of illegal consequences.

We'll now move on to our next question over the phone, which comes from Tyler Broda from Royal Bank of Canada.

Can I just ask in terms of the operations still continuing? But at this stage, without any further permits or either mining or exploration, how long can the operations go before they start becoming affected? And I guess, second to that, how do you achieve clarity from the government on what the new process will be, if there is at all? I mean what's the legal process you can follow?

Sure. So with information -- again, we have not received any legal information yet, Tyler. So based on the legal point of view, I mean, there's nothing that we have to do at this point in time. If what the Head of Cabinet tweeted is correct, then we need to stop our operations, start closing our operations right away or getting into 2022 or 2023, depending on the case in Inmaculada and Pallancata. So that will be the situation that doesn't get clarified or rectified. Going forward, what we have also been very clear in saying that we are permanently open to dialogue. When we saw the violent protests a couple of weeks ago in Apumayo and Breapampa and since our mines are also in Ayacucho where these other 2 mines are located, we requested a meeting with the Head of the Cabinet. That was not granted. And we have -- even though that situation has happened, we have been very clear to say that we are permanently open to any kind of dialogue or communication. And we have made ourselves available to meet whenever and wherever the Prime Minister decides to meet. So the first instance will be to start to engage in a positive, in a constructive dialogue with the government. If that does not progress, obviously, we believe that this measure will be a completely legal measure, and we are willing to pursue all the different legal defense alternatives that we have under our control.

Okay. So just to confirm at the start there, so you can keep operating until 2022, 2023 without any impact here?

Again, that's unclear because we have not received anything yet. But based on those informal comments and news that we have received, that would be the case, yes.

Yes. No. Perfect. And then just in terms of -- could you just run through your financial position at this point, I mean, your net cash, strong balance sheet today and we should be watching out for in terms of cash flows from this at all?

Sure. I have Ramon cover that, Tyler.

Thank you, Ignacio. Yes, Tyler, look, right now, as you know, we have probably close to $280 million, $290 million in cash. Our debt, as you know, we have a loan with BBVA and Scotiabank for $200 million. We have been in contact with both banks during the weekend. And both of them have expressed a full support for us. They mentioned that they understand the erratic behavior of our government. They are hopeful that the situation will clarify going forward. Of course, we will need to continue being in very close contact with them. But so far, what I can tell you is that they have expressed their full support to the company.

We'll now move on to our next question over the phone, which comes from Tim Huff from Peel Hunt.

Just to clarify. I know you hit on it, but it was the exact same question that Tyler had, which is the existing mining permits and the existing exploration permits are obviously going to be different time lines. If your mines are able to run through 2022, 2023, my guess is, and if you could confirm it, is that your exploration permits in place currently allow you to run through that time line. And it would be the granting -- the non-granting of further exploration permits that would prevent you from going beyond that period. Is that correct?

Yes. No. And again, Tim, this is still completely unclear because we, again, have not received any notifications. So this is just a speculation based on what we have been seeing in social media. But if the interpretation that -- one of interpretation, which is the fact that she's asking for these mines to retire and close and also forbidding any kind of extension or expansions of current operations and exploration. What we are going to see is that in 2022, we are going to be producing, but what is not going to happen is that we're not going to be to develop new areas that are important for that in 2023 production. So the impact will be felt beginning in 2022.

That's right. It will be beyond that. So you won't see the uplift in '23, but you won't have the exploration permits for further development into '23 and substantially into '23 as well.

Exactly. In '22 -- it will start in 2022 and getting into 2023.

Okay. I imagine this is sort of the -- I mean, I know we talked about closure previously with Jason's questions, but my guess is that the near term, those exploration permits and the granting of those is going to be one of the priorities when you eventually get, I don't know, in contact with the government or clarification from the government. Is that right?

Absolutely. Absolutely. The things that need to be rectified are both: the comment made that these mines need to retire and close, and the other one is that this provision of getting additional extensions or expansions in exploration and operation. Those, in our view, are completely legal under the state of law. You have the law, and you have regulations, which are processing to eliminate arbitrarity and to guarantee the -- or to give confidence and trust to the mining sector to continue investing. So if you continue doing the right things and doing what you need to do and complying with all the requirements, you should get those extensions. That's what the law says. And that's what -- those are the rights that we need to push and make sure they are respected, Tim.

Okay. That's great. And just the last question. I don't know how often you guys request meetings with heads of cabinet and so forth. But when you requested the initial meeting with the Head Cabinet, it got denied. Were you surprised that it was denied?

Well, we're working in the new...

I mean do you -- sorry. Yes, sorry, not to open up a question. Just from a very standard perspective, is it usual for a Head of Cabinet to deny meetings? I know it's a new government and so forth. But do you usually have to request several attempts at meetings before you get in touch with the Head of Cabinet?

Well, in our view, on a nature -- on a situation of this nature team, if a meeting is requested, in our view, is a meeting that should be granted. In these type of actions, we completely -- we're completely against being a unilateral or arbitrary decision, particularly when they are illegal. So in our view, these type of decisions need to be previously consulted, and all the parties involved need to be heard before any kind of measure of this nature is taken.

Okay. That's really helpful. I really appreciate the questions, and good luck with everything.

Thank you. Thank you, Tim.

Thank you. We'll now take a follow-up question from Jason Fairclough from Bank of America.

Ignacio, look, just -- have you been in contact with the CEOs of some of the other mining companies? And I guess, specifically, I think Breapampa is owned by Buenaventura. And then Apumayo looks like it's owned by Minera Andina de Exploraciones. But then, of course, we've also got the very large mining companies that operate in Peru. So we've got Southern Copper. We've got Anglo. We've got Glencore, and we've even got BHP. So have you been in touch with any of the other mining companies maybe via some kind of approved in-mining organization?

Absolutely, Jason. We have not only been in contact, but we have coordinated permanently in the past 48 hours with their full support and with the support of the entire National Mining Association and not only the National Mining Association, but the CONFIEP, which is the group of -- is the association that groups all the business associations or most of all businesses in the country, the strongest association nationwide, and many different chambers of commerce. And obviously, we are exactly all on the same page and fighting this together. Regarding the other companies in the region, one, as you say, is Apumayo, which is owned by the Castillo Group of Companies; and Breapampa used to be owned by Buenaventura, now is owned by another company called SAMI. So yes, we have been in touch with them as well. We actually did a press conference together, first thing Monday morning -- Saturday morning, sorry, and the coordination with the National Mining Society and the CONFIEP are permanent, are completely ongoing. And yesterday night, in the Peruvian press, the representatives of all these companies and associations have been in the press, giving the same type of declarations that we're giving today now.

And then just a bit of a funny one here, but does this impact at all your efforts in terms of listing your Rare Earths business?

No, Jason. No. In our view, this does not impact those efforts to list our Rare Earths business.

Okay. In terms of your potential recourse here, right, so you've talked about pursuing every avenue that you have to protect your rights, to protect the rights of shareholders, to protect the right of employees, to protect the right of stakeholders, could you just walk us through what your options are? I mean, I guess, the first one is talking, so that's an open offer. But thereafter, what do we do?

Yes. That is still something that is being evaluated, Jason. And the main reason is because we have not received, again, any kind of legal notification on this. And we need to see what the final position of the government is going to be. So what we're waiting for right now is hopefully an invitation to talk, to dialogue, to discuss this and see what's the final outcome. In the meantime, we're evaluating all different avenues, and those include the fight of this action at the local level but also evaluate the possibilities using the international instances as well. And as I said, if this does not get corrected or rectified, where we need to go to all the different and the maximum defense levels that we have from a legal standpoint.

We'll now move on to our next question over the phone, which comes from Jonathan Guy from Berenberg.

A couple of questions. Firstly, have you had any feedback from the other ministries, I guess, Ministry of Mines, Ministry of Finance? And where does the Office of the President sit on all of this? And have you had anything from them? And secondly, just looking at the permits you've got and will need, if they decide to squeeze you at all, is there any vulnerability around explosive permits or ability to deposit tailings or to draw or use water? I mean are there risks to the other operational permits that you need just to maintain operations as things stand?

Thank you, Jonathan. So regarding the feedback from other ministers, what we have is -- what I just mentioned is that the Vice Minister of Energy and Mines and the Vice Minister of Environment were also yesterday on the political programs from Sunday night, and they both ratified our view that these mine closure plans are dynamic and live documents and that they will and have the right to continue renewing and modifying as the mine progresses over time. So denying the claims stated by the Head of the Cabinet. So in our view, that's a clear signal of support. They have also said that this is not -- there's not a political drive to make a decision on whether they should progress or not. This is a completely technical decision, which, in our view, also fully supports our position. So we expect that the support that we're seeing or that has been verbally expressed yesterday is a support that will continue to try to take this outcome in the right direction. Regarding the other permits on risk, again, this is very unclear because we have not received any formal notifications. But -- so it's going to be highly dependent on what is going to happen. If they're going to let us operate until the mine permit expires is one situation. If we're going to continue operating is another one. But they have not made any references, whatsoever, to other types of permits. The only thing that has been expressed now is regarding these mine closure plans, and no specific reference to other permits such as explosives or other things have been made.

And anything from the Office of the President? And could you just sort of set out what the powers that the Head of Cabinet or Prime Minister has within the Peruvian system? Do they -- is it like the British system where the Prime Minister has a lot of power and can direct the Cabinet? Or is it different? Is it more of an administrative role? How does it fit within the Peruvian system?

Yes. So no comments or response from the Office of the President yet. And in the case of Peru, Peru has a presidential system. So the person that runs the country is the president. It's not us in the U.K., who is the Prime Minister. So in the case of Peru, there's a president. And the Head of Cabinet is basically a minister that has no specific area to run like could be secretary of economy or the secretary of environment, of energy and mines. No. But is the -- a minister that coordinates with all the cabinet and is the Head of the Cabinet, head of the of all the different ministries and report directly to the president.

But Ignacio, this is Jose Palma, if I may add. She does not have the legal power to require a mine to stop operating and close it. That is actually clear.

Exactly. Thank you, Jose.

And that's why we think there is an arbitrary and illegal measures.

We'll now move on to our next question over the phone, which comes from Richard Hatch from Berenberg.

Yes, just a quick one. In the release, you talked about alleged environmental complaints. Have you got any idea what those minutes are referring to?

We don't. We don't because this communication is very big and it relates to the 4 mining operations that are in the region. They have not made any specific claim to us. And what I can tell you is that we comply with all regulations. We have no contamination in our operations. We are permanently supervised and regulated. Mining is a very regulated industry in Peru. We're primarily regulated by OEFA, which is environmental agency by OSINERGMIN, which is the energy and mines agency by Diana, which is the water authority, and many other different authorities that are permanently supervising and regulating and inspecting us. And we have absolutely no knowledge of what they may be referring to based on any of the supervisions that we have got.

[Operator Instructions] We'll now move to our next question over the phone, which comes from Kieron Hodgson from Panmure Gordon.

Just thinking a little bit more laterally. In a way, do you think that you're being used, in a way, as a pawn to a wider negotiating tactic by the government in order to bring the whole mining industry to the negotiating table, which ultimately provides the state with a larger economic take and also, at the same time, appeasing the electorate?

Yes. Thank you, Kieron. No, at this point in time, we do not like to speculate on what are the main reasons behind that. But what I can tell you is that if this situation does not get reversed, the damage that it would have on the mining sector, on the private investment in the country, on the stability of the country and obviously, in the generation of employment, of millions of employments in the country would be really, really serious. So I don't know at the end what that -- we don't know. We cannot speculate on what the final intentions of these are. But what I can tell you is that even if this one alone goes ahead, the damage to the country would be really, really serious.

Yes. Wishing you the best of luck, gents.

Thank you, Kieron.

It appears there are no further questions queued over the phone at this time. So I would like to turn the conference back over to Mr. Bustamante for any additional or closing remarks, sir.

Thank you very much, Simon, and thank you very much, everybody, to participate in this conference call. And as usual, should you have any additional questions, please feel free to contact Charlie Gordon directly at our London offices. Thank you very much. Good day.

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