Hochschild Mining plc (HOC) Earnings Call Transcript & Summary

Good day, and welcome to Hochschild Mining Plc Q3 2022 Production Results Conference Call. At this time, I would like to turn the conference over to Mr. Ignacio Bustamante, CEO. Please go ahead.

Thank you very much, Ben. Hello, and welcome to our conference call to discuss our third quarter production results. I'm here in Lima. And with me is Eduardo Noriega, our CFO; and from London is Charlie Gordon, our Head of Investor Relations. I will talk about the operations first and then cover our progress at Mara Rosa and the exciting discovery for the medium- to long-term that we have recently made at Pallancata. Good production in the quarter was just over 94,000 gold equivalent ounces or 6.8 million silver equivalent ounces, which makes it our strongest quarter of the year. Year-to-date, we have produced 261,000 gold equivalent ounces, and we are, therefore, on track to meet our full year guidance of between 360,000 to 375,000 gold equivalent ounces. Inmaculada delivered a good quarter with better-than-expected grades and recoveries. Production was almost 40,000 ounces of gold and 1.5 million ounces of silver, which is a gold equivalent total of 61,000 ounces. Overall, in the first 9 months of the year, Inmaculada's output has been almost 173,000 ounces of gold, which is a little above our forecast. Regarding the Modified Environmental Impact Assessment process, at the end of September, we completed our submission to the Peruvian government of its follow-up comments and are currently expecting a final decision before the year-end. In Argentina, San Jose has strongest quarter of the year with better-than-expected silver grades. Output was 3.2 million silver equivalent ounces, which therefore gives us 7.9 million ounces year-to-date. Over at Pallancata, production was around 800,000 silver equivalent ounces in Q3. And since we have hedges in place for 4 million ounces of silver this year at a price of close to $27 per ounce we're at a better position than the current silver price might indicate. Our brownfield teams [indiscernible] targets remaining within the existing permitted area during the remainder -- reminder of a -- the remainder, sorry, of 2022. Depending on those results and, of course, precious metal prices, we will decide on whether to place the mine on care and maintenance in 2023. In terms of costs, we remain on track to keep our 2022 guidance, which if you remember is between $1330 and $1370 per gold equivalent ounces. Turning to our Mara Rosa construction project we have made strategic headway with a total project progress at 16%. Detailed engineering is now 90% complete, and we have made good advances on the earthworks, procurement for the equipment, key equipment and infrastructure, and we have also made a start on foundations for the processing plant. We are on track for first production in the first half of 2024 which now is not too far away. [indiscernible] project in British Columbia,we transfer for the processing plant and the Tailings and Waste Rock Storage Facility were completed in the quarter, along with an updated resource model. The study results will be available at the end of the year. And with this information, we will make a decision on plans for next year. The key piece of news today is the discovery of a major new resource at Pallancata in an area which is known at the Royropata zone, we have drilled high-grade structures with good width just outside the current permitted area. You can see the results in the press release but the highlight is undoubtedly 16.6 meters at 8.5 grams per tonne of gold and over 2.5 kilos of silver. This is a good drill result that we have ever had at Hochschild. We are aiming to complete an initial inferred resource in the next few weeks, and we will then give you some more detail. [indiscernible] for this new Royropata zone will take approximately 3 years but we do believe that we have now secured an exciting medium- to long-term future for the mine. On the financial side, we have approximately $169 million of cash which translates to net debt of $151 million and a net debt to last 12 months EBITDA of 0.55x as at the end of September. We are in a good position to fund the CapEx for Mara Rosa in 2023. So to sum up, we had a really solid quarter of production and are on track with our 2022 operational targets. We currently expect Inmaculada's Modified Environmental Impact Assessment process to be completed by the end of the year. We are making further good progress with our Mara Rosa project in Brazil, aiming to start production in 2024, and we're really happy to announce a major discovery at Pallancata, which ensures the medium- to long-term future of the mine. With that, I would like to open up for any questions that you may have.

[Operator Instructions] The first question comes from the line of Patrick Mann calling from Bank of America.

I just wanted to ask about the capital budget at Mara Rosa. So we've seen a lot of inflation hitting other mining projects in the broader industry. How confident are you in the contingencies on that project? Or should we expect -- I know it's early days, but how big is the risk of a CapEx overrun here at this project?

Thank you, Patrick. So we have a continued evaluating this in detail and actually have continued already bidding out very important components of the total CapEx for the project. We initially have -- we did our evaluation in Mara Rosa, we considered from the very beginning, an important cushion anticipating some inflation and some contingencies that are already built into our $200 million CapEx guidance and budget for the full 2 years, 2022 and 2023 for Mara Rosa. Based on the information that we are seeing so far, we believe that we are very much on track to complete it on time and on budget. Certain inflationary components that we're seeing were anticipated, some of them that might not have been anticipated have been compensated by other efficiencies obtained elsewhere. And of course, we have had the help of the devaluation of the Brazilian Real, which is a very important component in most of -- the most important part of the cost components of the total CapEx. So in short, we continue feeling confident that the project is on budget and should be built within the $200 million guidance that we gave to the market from the beginning.

Great. And then maybe another question, if I may. Just on Pallancata discovery outside the permitted area. Can you just explain the steps from here? So I imagine you continue drilling and then how long maybe how long until we could that come in to sort of move from Inferred to measured and possibly into reserves and into a mine plan. Are we talking about 5, 10 years or quicker than that, yes?

Sure. So as we have been mentioning for some time, Patrick, we have 2 plans in place for Pallancata. We have a short and the medium to long-term plan. On the short-term front, as you know, we don't have too many resources left that are profitable at these prices. So we are still finishing our budgeting process to see how long we can run Pallancata for into 2023, and we are also looking for additional drilling targets in these remaining months of the year to see if we can come up with additional profitable resources within the operating area. So on the short-term, no, it looks like no, the end is approaching, but we are trying to see if we can extend it as much as we can. And we are going to continue giving you further updates on that. On this new area, this area is outside of the permitted area. So the plan that we have is we already are in the process of finishing an inferred resource that we expect to present to the market in the next few weeks. After that, we are going to be doing the drilling program to turn it into measured and indicated, which will expect that is something to be completed in 2023. And in parallel to that, we are going to be starting the permitting process. The permitting process is a process that we expect that should take somewhere around 3 years. And once that process is completed, you have to remind that this is very close to our current operational area. And also, we should be in a position that we can start the mine development and accessing the mine relatively quickly and the material can be put into production immediately because it's going to be using the same processing facility that we have in place. So it's something that we see for the next 3 to 4 years and not for the next 8 to 10.

Great. Thank you for the extra detail. I appreciate it.

The next question comes from the line of Tim Huff calling from Peel Hunt.

The question I had on Pallancata has been answered. But on Mara Rosa, I mean you guys have given the stats, everything is on time, on budget, and it's 16% complete. I guess what are the biggest hurdles left in the next 1.5 years as you go through the construction process? I mean what are the things that you worry the most about? Because it is true that it's one of the questions that we get the most on how Shield just because of inflationary measures. And it sounds like from a financial perspective, you are relatively confident at least in the near term that that's contained. But are there any other hurdles on Mara Rosa that you particularly are keeping a close eye on in the coming 12 to 18?

Sure, Tim. So definitely, definitely because we have already secured an important percentage of our total cost components, but there's still some less, although the major ones have already been secured and locked in terms of price. But as you know, inflation is uncertain, and we need to continue dealing with that. As I said, we have the help of the devaluation of the Brazilian Real that is giving us an important cushion there. But I would say inflation is something that we need to continue monitoring, although as I said so far, we feel confident that we are going to be within budget, but it's something that we need to -- we cannot let our guards down on inflation controls. We -- in terms of permitting, you know that permits is an ongoing process. So, so far, we have tender much all the project that we need for these initial stages but along the road, there are certain other permits that we're going to have to deal with, but they are not a bottleneck and they are not constrained in terms of timing, and they don't look also overly complex. So we should be fine also on that front. And the other one is making sure that the engineering team that's the best possible job in terms of coordinating the efforts of the different suppliers and contractors so that we avoid any delays on the suppliers or equipment that are on the critical path. So those, I would say, are the key challenges. But so far with the way that we have seen the team managing the project and the advantages that we have seen in terms of securing equipment and contracts and that sort of things. We feel very confident that the project will be very well to be completed on time and on budget.

We currently have no questions coming through. [Operator Instructions] There are no further questions, so I will hand you back to your host to conclude today's conference. Thank you.

Thank you very much, Ben, and thank you very much, everybody, for participating in today's 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 rest of the day.

Thank you for joining today's call. You may now disconnect.