Hochschild Mining plc (HOC) Earnings Call Transcript & Summary

Good day, and welcome to the Hochschild Mining's Q4 2022 Production Report Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Ignacio Bustamante, Chief Executive Officer. Please go ahead.

Thank you, Kevin. Hello, and welcome to our conference call to discuss our full year production results. I'm here in Lima, and with me is Eduardo Noriega, our CFO. And in London, we have Charlie Gordon, our Head of Investor Relations. I will talk about the operational performance first and then cover permitting at Inmaculada, progress of Mara Rosa, progress of Snip, and the resource we have announced at Pallancata, along with our financial position. Gold production in the quarter was just short of 98,000 gold equivalent ounces or 7 million silver equivalent ounces, which is our strongest quarter of the year. Therefore, for the year's gold, Hochschild produced 359,000 gold equivalent ounces, which is a touch below our guidance of between 360,000 and 375,000. [indiscernible], given the disruptions that we have tried to deal with in Peru for the last few months. Inmaculada delivered its strongest quarter with better-than-expected grades offsetting slightly below budget tonnage. Production was just over 42,000 ounces of gold and 1.6 million ounces of silver, which is the gold equivalent total of 64,600 ounces. Overall, Inmaculada's output in 2023 has been just over 237,000 ounces of gold, which is in line with our revised guidance given to the market in August and again demonstrates the consistency of our flagship asset. As you know, we have some local and international disruption in the final quarter, but I would like to commend our team at Inmaculada because these have been very difficult circumstances for them to operate in, and they have done a great job in delivering such a strong quarter and a reliable annual results. In Argentina, San Jose had another solid quarter with better-than-expected tonnage being the key feature. Output was 3.1 million silver equivalent ounces, which therefore, is up 11 million ounces for the year as a whole. The total, which you may remember, has been slightly affected by the fire in the crushing area and COVID related absences in the first quarter of the year. Over at Pallancata, production was similar to the third quarter at around 800,000 silver-equivalent ounces, which reached the annual total to 3.2 million ounces which is a touch below the revised forecast and reflects the long-term decline in silver grade profile in a mining area that is close to completion. In terms of costs, I am pleased to say that we remain on track to hit our 2022 guidance, which if you remember, is between $1,330 and $1,370 per gold equivalent ounce. Obviously, the key issue facing the company is the government decision on the modification of Inmaculada's environmental impact assessment or the MEIA for short. What I can say is the process remains ongoing as we speak. Our current expectation is that we can expect a final decision by the end of this quarter, and we have, therefore, today issued a production cost and CapEx guidance for 2023 quarter basis. Clearly, if there are significant delays or a negative decision, this will impact the existing mine plan and resulting levels of production in 2023. Failure to secure approval of MEIA will result in a suspension of operations at Inmaculada during the second half of 2023, and [indiscernible] if approved. The specific date of suspension will depend on operational factors that are currently being evaluated. We have also decided that it will be preferable to issue full year results with recession under our belt. We have therefore moved results to the 20th of April to allow further time for the process to be completed. Turning to our Mara Rosa construction project, we have made more good headway in the final quarter of the year with the total project progress now at 50%. Detailed engineering is now at 96% complete, and we have made good advances on the earthworks, procurement and infrastructure, and the processing plant area is now 32% complete. We remain on time and within budget, and still expect first production in the first half of 2024, which is now only a year away. We have also today announced the key results from the PEA that we have completed on the same project in British Columbia, which shows solid returns at a relatively conservative gold price, which is highly encouraging. We are currently working on our plans for next steps of the project, although clearly the focus of the company remains on the construction of the Mara Rosa project in Brazil. The key piece of positive operational news today is the size of the resource that we found last year close to the Pallancata operations. You can see in the release that there was [indiscernible] resource of over 50 million silver equivalent ounces at a combined grade of 848 grams per tonne, silver equivalent, found with an average width of around 5 meters. Although permits for this is will take approximately 3 years, we do believe that we have now secured an exciting medium- to long-term future for Pallancata. And there's lot of potential to grow this number in the next few quarters. On the financial side, we have approximately $144 million of cash, which translates to net debt of $175 million and the net debt to EBITDA for 2022 of 0.69. As I mentioned, we have also provided guidance for 2023, assuming approval of the permit in the first quarter. In summary, we expect to produce between 301,000 to 314,000 gold equivalent ounces at an all-in sustaining cost of between $1370 and $1450 per gold equivalent ounce. We have used the average ratio for 2022 of 83x gold to sliver. For those forecasts -- so we have used -- that [indiscernible] for those forecasts. And if you're interested in seeing the split for the forecast by mine, you can find it in the release that we have published today. Sustaining and development CapEx is set between $125 million to $135 million and project capital for Mara Rosa is approximately $100 million to $110 million for the year. So to sum up, we are proud of all the efforts from our operational colleagues in delivering output only slightly below guidance despite a complex social situation in the country and at costs in line. We are making further good progress with our Mara Rosa project in Brazil and are really happy to announce a 50 million-ounce resource already from the Royropata zone at Pallancata which ensures the future of the mine in the medium to long term. And finally, we currently expect the Inmaculada's MEIA process to be completed by the end of the current quarter. And with that, I would like to open up to any questions that you may have.

[Operator Instructions] The first question today comes from Marina Calero of RBC Capital Markets.

Just a question about the current operating environment in Peru. It seems you have managed to operate during the last quarter of the year without any major disruption. I would be interesting to see how you see this playing out this year? And what mitigating actions have you taken to protect your assets or potentially offset any impacts in your supply chains.

Sure, Marina. That's a tough question to answer, no? So I'll try to do my best, now there's a lot of uncertainty around this. What I can say is that earlier in the fourth quarter of last year, we had some community specific issues that we had to deal with that you have probably seen in the press. Fortunately, those conversations with our communities have been moving forward, I would say, so far advancing well. We have now [Indiscernible] with the participation of the government with our most important communities and those conversations are going well. So I would say -- regarding a community-specific matters and company-specific matters, I would say we are in a much better position now than we were a few months ago. The big challenge now is pertaining to the overall country situation, which is impacting mainly, but -- although it's impacting the entire country, but most of the deposits are found on the southern part of the country, which is where our operations are located. So what we are seeing is on and off roads gets blockade and thus demanding significant challenges for us and for our personnel at the mine, because the uncertainty of whether the shift changes for the personnel is waiting to happen or not. So fortunately, with the cooperation of all our people and significant efforts and commitment that we are happy to deal with this uncertainty necessarily having to delay for a few days the shift changes and the people is helping us really to cope with that. Same with materials, no? Materials is different because you can advance them during the blockade, not depending on which roads are open, which roads are blocked. And once the road gets unblocked, then you can advance to the next piece of the [indiscernible]. So it's been a challenge. But I would say so far, we are doing well. We have managed to produce a pretty much full capacity. We have recently completed shift changes on most of our personnel in our mines. And we have a good level of stocks in our mines. So we do not anticipate any short term or very short-term matter. And we do believe that this process are going to continue for some additional time. So we need to continue being very active in managing logistics and our people to make sure that this -- that we are prepared for [indiscernible] and we minimize any potential impact to [indiscernible] but I'm afraid I'm not clear of the social situation and the political station in the country, it's so uncertain that we need to be prepared to deal with this uncertainty and social situation for the next few weeks.

The next question today comes from Daniel Major of UBS.

Can you hear me all right?

Yes. Dan.

Yes. Okay. Yes, so first question around, I guess, scenarios with respect to the shutdown of Inmaculada, if you don't receive the environmental permit. I think you mentioned you had $140 million of cash on the balance sheet. Can you give us just a quick review on the other liquidity, whether you've got covenants on any debt, if your EBITDA were to dramatically decline as a consequence of shutting Inmaculada, and your ability to complete the Mara Rosa project from a perspective of sort of funding if there was essentially very limited or no cash flow out of Peru?

Yes. So I hand the details on the financials to Eduardo Noriega, Dan. What I can tell you is that at the end, there is no exact answer yet because clearly, as you can imagine, it's not that we're [indiscernible] scenario which you see the [indiscernible]. So there could be many things along those lines and [indiscernible] on the answer that we have for the government -- the different scenarios [indiscernible] it's a delay for a few days or of a few weeks or more than that or months or whatever. So is very highly dependent on that. But let me pass it to Eduardo so he can give you a look on our financials as we stand.

Thank you, Ignacio. Thank you, Daniel. Yes, as you pointed out, we have close to $144 million in cash. And the total debt of the company is close to $300 million. Can you hear me?

[indiscernible].

So -- and then the pending CapEx for Mara Rosa is a little bit higher than $100 million. So as Ignacio pointed out, we are -- we need to evaluate the situation to see what further action we need to take in case there's an issue with MEIA. But there are certain -- there certainly is a discretionary spending that we can manage. And we're looking at other options as well not to prepare for that scenario. But so far, we will continue planning for different scenarios.

Sorry, can you hear me, okay?

Yes, we can hear you. Yes.

Yes, sorry. Okay. Yes, I guess it's going to be -- see what happens with the decision. Just a second question on that. In terms of what part of the government or where is the decision sort of sitting, and is there any impact of the political and social turmoil on the decision around the environmental permit? Or is that sort of independent of the current sort of crisis situation?

Yes. So there's an entity at the government that is called SENACE. That is an entity that centralizes all the permitting process, okay? And SENACE is subscribed to the Ministry of the Environment. Now in turn SENACE is in charge of coordinating with all different organizations within the government that participate in this process, such as versus the water authority or the national parks authority or the archeological section or culture. And they direct and they centralize everything. So right now, the main coordination that we're having are with SENACE and with the water authority and with a park authority. Those are the 3 that we are interacting directing with. And -- in general, I would say that the overall social situation in the country shouldn't have an impact or a material impact on this process. But obviously, if there are certainties that are particular to some of our operations on the social front, those are things that could play a role in the permitting process. As I mentioned, we are feeling much more comfortable now than we were feeling a few months ago, our own [indiscernible] relations front. And again, the national protest, which is the problem that we're facing today shouldn't have an impact.

[Operator Instructions] The next question comes from Charlie Rothbarth of Berenberg Bank.

Can you hear me?

Yes, Charlie. [indiscernible].

Perfect. My question revolves around Pallancata. And just in terms of if you were to shut the mine at the end of next year, would you have any inventory you would expect to release from there over the course of this year that we should think about?

Yes, I mean, the current plan of Pallancata is that Pallancata should stop production sometime this year, in 2023. That's the way that we have produced our guidance. So we continue doing efforts to try to extend the life of mine, but the working assumption is that it will be shutting down some time in Q4 of this year. If there are any changes to that, either to extend or to reduce it because for whatever reason might not be profitable, we're going to be updated in the market as soon as we have the most clear picture. But right now, our current assumption -- working assumption is that we will continue closing in the last quarter of 2023.

Okay. Yes. Do you have any inventory on the site that you'd be selling above your guidance over this year, assuming that the mine planned shuts in Q4?

No, no, no, basically no inventories.

As there are no further questions at this time, I would like to turn the call back to Mr. Bustamante for any additional or closing remarks.

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

And that does now conclude today's conference call. We thank you all for your participation. You may now disconnect.