Hochschild Mining plc (HOC) Earnings Call Transcript & Summary

Good day, and welcome to the second quarter results of Hochschild. At this time, I would like to turn the conference over to Ignacio Bustamante. Please go ahead, sir.

Thank you very much. Hello, and welcome to our conference call to discuss our second quarter production results. I'm Ignacio Bustamante. And in London, we have Eduardo Noriega, our CFO; and Charlie Gordon, our Head of Investor Relations. And in our Snip project, we have Tom Eliott, our Vice President of North America. Gold production in the quarter was almost 86,000 gold equivalent ecobee ounces or 6.2 million silver equivalent ounces. The San Jose mine in Argentina recovered from it COVID impact in first quarter was over in Peru Inmaculada had a solid period. Overall, in the first half, we produced almost 167,000 gold equivalent ounces, and we remain on track to meet our full year guidance of between 360,000 to 375,000 ounces -- sorry, between 360,000 and 370,000 ounces. Which is very pleasing given that we are operating in an environment of considerable economic challenges. At Inmaculada, a temporary mine plan schedule for lower grades late in the quarter, but recoveries remained better than expected. Production was almost 35,000 ounces of gold and almost 1.4 million ounces of silver, which is gold equivalent production of 53,200 ounces. Overall, in the first half of the year, Inmaculada produced almost 112,000 ounces of gold, which was a little above our expectations. As you just comment that we are now in the final stages of the permitting process for the modified EIA for Inmaculada, and we continue to expect completion during H2. In Argentina, you may remember, we talked about COVID again impacting us in the first quarter. We also had a fire in the crusher area, but this has not affected overall production guidance and actually, the cost will be covered by insurance. In the second quarter, we had an improved performance with better-than-expected gold grades. Output was 3.1 million silver equivalent ounces, which therefore gives us 4.7 million ounces for the whole of the first half. Over at Pallancata, we produce just short of 800,000 silver equivalent ounces. And of course, we have we have hedges in place for 4 million ounces of silver this year at a price of close to $27 per ounce. So we're at a better position than the currency bond price would imply. However, given the fall in those prices and the ongoing lower-than-expected grades, we are currently considering all options regarding the viability of our future economic mine plan for Pallancata as it nears the end of its current resource life. In terms of costs, we are on track to keep our 2022 guidance, which if you remember is between $13.30 and $13.70 per gold equivalent ounce, which is also remarkable given the current inflationary environment. Turning to our projects. On April 1, we completed the acquisition of Mara Rosa in Brazil. In Q2, we have made good headway on this exciting project with a total progress of 7% by the end of June. Detailed engineering is now 71% completed, and we have already purchased some of the long-lead time equipment such as ball mills and filters and the crusher is in the process of being delivered to site. In addition, contracts for the EPCM and for the earthworks and pre-stripping are also being progress whilst the various power line and construction requirements have also made good progress. The only remaining permit is in the forestation permit, which should be granted in this quarter. Upping the snip project in British Columbia, work progress on the Pre-Feasibility study with metallurgical test work and a flowsheet trade-off study all completed during the quarter. The designs for the processing plant and an updated resource model are expected to be finished this quarter and the full study remains on track for completion at the end of the year. We also executed a Twin hole drill program, and you can see in our release, the first encouraging FAs that we have published. Our 2022 Brazil program also continued during the quarter at all our operations. We delivered some positive results of Pallancata outside the current permitted area. So this should continue to the medium-term exploration plan while we continue with existing short-term targets. On the financial side, our balance sheet remains in a healthy position with $205 million in cash at the end of the quarter, which, of course, reflects the position of Amarillo early in the period. So to finish, we are on track with our 2022 operational targets, both production and costs. We are making good progress with our Mara Rosa project in Brazil, and we are on track to deliver a pre-feasibility study at this new project by the end of the year. And with that, I would like to open up to any questions that you may have.

[Operator Instructions] We will take our first question from Daniel Major from UBS.

Guys, can you hear me okay?

Yes. Very well, Dan.

Okay. Great. Yes, first, a couple of questions. Yes, so when you -- we think about Pallancata and, I guess, the base case at sub-20 silver, I know you've got hedges in place. I mean given, I guess, a minus cash negative at this point given the lower production and therefore, the higher cost base, is it fair to assume the base case would be closure in the second half of 2022, unless something sort of meaningful changes.

I would say, in general, that will be the case, Dan. We continue, however, with our short-term drilling targets. So what we -- I believe the base case here should be that we will continue producing Pallancata for the whole of 2022 while we continue giving time to our geological team to continue drilling the remaining targets. But if nothing comes out of that, the most likely scenario is that by 2023, Pallancata should not be in operation. Having said that, as I mentioned in my presentation, we are very encouraged for the medium term to long term in Pallancata. We have discovered these new structures, unfortunately outside of the permitted area, which are Laura-Demian and particularly Royropata [indiscernible] are giving us a lot of potential for the medium term. So it looks like the base scenario should be that if we are not lucky with our remaining targets for the short term during the second half of the year. We must have to put into the it under temporary current maintenance while we give time for the permitting for the new resources. But the new resources for the mean term are looking very encouraging, as you can see in our release.

Okay. Great. And if you look at the first half of the year, and I know you obviously -- or the third -- second quarter, you obviously closed the acquisition of Mara Rosa, but the underlying business still burned cash during the period, given the shift in the debt position. Can you give us a sense of where Were there any additional factors, working capital build or where the majority of the cash burn beyond the spend on -- in Brazil came from?

Sure. Let me pass that question to our CFO, to Eduardo Noriega so he can answer that. But let me just open up the answer by saying that typically, our first half of the year is always worse in terms of cash flow generation than the second half because in the first half of the year, we had tax payment, we have bonus payments, which are workers, we saw some dividend payments and that sort of thing. So typically, the first half of the year is always best cash than the second half of the year. But having said that, let me pass it over to Eduardo Noriega for a full answer.

Thanks. So yes, to complement what as in addition to the cash generated by our operations in the first half 2022, we had a temporary native impact in working capital of close to $30 million, which will be recorded in the second half of the year, but it happened in the past. And we also had another impact is close to $50 million or 2021 income tax payments that occurred in the first half of 2022. So that's also temporary effect. Finally, I will just highlight that in addition to that, we paid $12 million of dividends in the period.

Okay, great. So it sounds like working capital hang over tax payments. Okay. Final question for me. From a permitting standpoint, you still awaiting the EIA extension at Inmaculada? What's the latest status there given the current, I guess, uncertain political backdrop in Peru?

Yes. We continue moving. We are in the process of receiving the final observations. The government -- right now, all the position of the information is in the government's hands, which is something that is completely out of control, but we continue moving. And we -- as we mentioned, we explained that this is something that could be concluded during the second half of the year.

[Operator Instructions] We will now take our next question from Charlie Rose with Berenberg.

I hope you can hear me. Can I start by asking about Pallancata and what levers you can pull there to reduce costs down? And then outside, do you expect net operational guidance at Pallancata?

So Pallancata, what we are doing as a nation is we're finishing with the drilling targets that we have for the short term in this year. But absent any indications of potential success for those short-term targets -- what we're doing is we are winding down the CapEx growth that we are planning on doing in 2022, that was for the role of being able to extract the minerals and mine the minerals in 2023. So that's, I would say, the most important one. So we're cutting down on CapEx big time for mine development because at current prices, the mineral that we have left for 2023 is not profitable. So that should represent obviously, an important decrease in CapEx. In addition to that, we are optimizing the mine as much as we can in all our operating costs to see if we can take it into at least a breakeven or slightly positive cash generation by the end of the year. But it's a challenge given the reduction in silver prices that we have all seen. But we're working very hard on trying to do that. The most tangible one is the reduction in CapEx. And in terms of production for the full year, what we can tell you is that we continue inspecting to reach our production guidance for the year. The most likely scenario is that Pallancata going to be short of what we all anticipated. And the efficiency will be covered by Inmaculada. In because of Inmaculada, we are expecting to get into areas with higher grades during the second half of the year based on our mine planning. So that should compensate whatever loss we have in production from Pallancata.

Okay. And then at Inmaculada, if you don't get your EIA approved this year, would you expect that to impact production guidance at all?

Well, definitely, the permit, the modification of the metal impact statement that we are -- or asset that we're in the process of doing is what we need for the next 20 years. So clearly, if that does not get approved, the production plan, we have to change and we have to adapt to the areas that are currently permitted. But as I said, we continue pushing ahead for that to be finished during this year, and we continue -- we can expect to look at our next 20 years ahead of us following the new areas that we have found for the company.

We will now take the next question from Ian Rossouw from Barclays.

Just a follow-up on Pallancata. I mean it seems like the messaging has changed quite a bit. So I mean, obviously, the silver price has fallen, but by understanding from what you've said previously in the year was that you've hedged obviously production for this year and you've hedged production for 2023. So Pallancata will generate cash because of these hedges. So has something changed? I mean is the reserves not what you thought it would be? Or are you looking at the asset sort of cash flow separate from these hedges? Obviously, that's helping protect the margins.

So yes, it's a mix of 2 things. The first one, as you mentioned, is the price decrease, even though we have changes in place is not for the full production. Most of the reduction in gold and silver prices is hurting the overall landscape in terms of economic returns for Pallancata. Clearly, our very hedges these prices are helping us a lot to compensate for that, but it's still having a negative impact on prices. But in addition to that, what we are seeing is that the remaining area, the resources that were remaining to be mined in 2022 and 2023 are -- most of them in the border areas of [metallurgical] formations, okay? So when you have that, you tend to have much more variability than when you're mining the new vein of the structure. So what we're seeing in general is a tendency that grades are lower than we had in our mine plan. Okay? So here is the worse thing to have in 2022 and what we are expecting in 2023 are coming up at lower grades than we anticipated, and that is also hurting our projections as well. There's a mix of the 2 things.

Okay. All right. That's clear. And then just a follow-up on Inmaculada. Could you give an indication of what grades do you expect for the second half?

We are not giving at this point in time indications on that end because we are seeing the process of completing the revised time plan to compensate for Pallancata. But what I can tell you is that we're expecting that the grades will be good enough to compensate for whatever production that we have in Pallancata. That's what you should expect.

Okay. And I mean the fact that you didn't change the top end of the guidance range, does that mean you think that's still realistic? Or should we look at sort of the lower half of that range?

I think difficult to say at this point, Ian, because we're in the process of completing our new or revised mine plan for the year. No. What I can tell you for sure, the bottom, we're going to be aiming to exceed that. I mean we're going to continue to try to reach to the higher end of the range. So still the range is open as of today.

[Operator Instructions] We will now take the next question from Chris Di Salvatore from RWC.

Listen, just a quick follow-up. The -- on the warning baton on Pallancata, right, I mean can you just -- I know you kind of hinted at it. But if you have a deficit component content '23, so if we kind of remove that from operations, would you expect kind of -- do you expect with the EIA coming through and drilling being successful to fully offset that in '23, if we take it off? Can you provide some sort of range in terms of where you think kind of recurring production might be if you kind of take away Pallancata. That would be my first question.

Thank you, Chris. We are not giving guidance yet for 2023. So I'm not going to be able to answer that. But I would say based on the information we have and absent any success on the short-term expression to that we have during the second half of 2022, it looks exciting that the Pallancata will not be contributing to production. And Inmaculada, on the modification of the barometer study approved should be hopefully higher than what we have for this year because we're going to be exiting areas with higher grades. But I don't know if that's going to be enough to compete by that. I mean, most likely, it will not be in a position to offset that. But how much? We don't know when we complete our plan and budget for 2023. So it's not possible for me to answer that right now.

Okay. When I look at the burning cash this asked before, but what level of -- if I think about the rest of the year, given you have quite a bit of outflow from Mara as well in the first half. What's what's kind of the burn you expect for the rest of the year? Where do you kind of think net debt levels out on kind of as we get to the end of '22 versus the 100 or some million we're at today? Yes, based on silver prices, et cetera.

Let me pass it over to Eduardo Noriega. I imagine a lot of a lot of is going to be highly dependent on what happens with gold and silver prices that have been very volatile, but let me pass it over to Eduardo. .

Thank you, Ignacio. Yes moving from that in a I think the most important investment that we're doing is the CapEx on Mara Rosa. Also that will be slower to cash reduction in the coming in the coming months. As you know, the guidance for construction CapEx is close to $200 million, below $200 million, and we have spent as sort of June close to $10 million also so that the use of cash, the most important use of cash that we'll have in the coming months.

Got it. But $200 million you initially guided that was over 2 years, correct? So you're expecting roughly half of that...

$200 million for 2 years. $120 million is the guidance for 2022 and $200 million for the full 2 years. .

Okay. And you're saying only 10% was at the door in the first half so far?

On the construction coverage, yes.

On construction, yes. Okay. Okay. I guess -- and just on the permitting with the government. I mean has anything changed since kind of you've given us an update on the Inmaculada EIA. I mean -- is there -- are there any indications that that's advancing more than since we've last spoken? Or is it kind of -- would you -- how would you qualify it? Is it the same place? You've been given a kind of feedback as to whether it will be addressed as you kind of think in the second half? Is there -- I mean, can you just -- if it isn't considered in the second half, can you give us an idea of whether that's a function of just timing of things? Or we are not getting the recognition from the government. Can you just give us more color on what's going on with that?

Sure. So since the last time that we had an update on Inmaculada permit, I would say the most important change has been -- or the most important event has been that we received the second to last round of observations, some of the different authorities, we already answered all those observations, okay? And in our view, the observations are all regular course of business. And we have completed all the answers. And now they are in the process of reviewing there are like 7 different entities from the government that had to do we have the cultural environment, we have the water authority, we have an asset a supervisor servicing there are entities in total. And the finance is the last consolidated, it's all the different questions and reports from all those entities. So they're now in the process of giving their answers and comments, which is going to be the final round of operations. So we expect that we are going to be obtaining the final round of comments or observations sometime around the end of July. And after that, we have about 15 days to answer the last round of observations. And after that, the plan is complete and now it's up to the government to complete the review of our observations. Everything that is under our control is very well completed within the time line indicated by the regulations. And we will do so. Once we receive all the observations from the remaining entity, this we're going to be answering within the following 15 days. We're actually already working ahead of any potential observations that may come. And once that is completed and submitted, then the government will review that and come back to us. So those are the banks that we cannot control. But the ones that are under our control, please remain profile that we will comply with all the deals that we have in our quarters.

That looks like all our questions. Are there any other questions?

We do have a follow-on question from Daniel Major with UBS.

Sorry. Quick one. When exactly does the EIA Immaculada expire or what's the deadline for extension?

Yes. We currently have our mine closure permit value until the end of 2023.

End of '23. Okay, cool.

[Operator Instructions] It appears we have no further questions for today's call. So I would like to turn the call back to our host for any additional or closing remarks.

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

Thank you. This concludes today's call. Thank you for your participation, and you may now disconnect.