Hochschild Mining plc (HOC) Earnings Call Transcript & Summary

Everyone, here is Eduardo Landin. I am the new CEO of Hochschild Mining. Let me say that I have been in the role for 10 days now. First of all, I would like to thank Ignacio Bustamante for his contribution to the company in the last 32 years. And also for the transition period that has been very positive for the company and for me. Today's presentation, I'm going to give you some highlights of the H1 results. First of all, we have a robust operational and financial performance, revenues of $314 million, EBITDA around $100 million. Our cash balance is $94 million. The all-in sustaining cash costs of $1,572 per ounce of gold. We have presented a revised 2023 production target. It will be between 289,000 and 303,000 ounces of gold and our revised all-in sustaining cash cost target, it will be between $1,490 and $1,580 per ounce. The good news is that Inmaculada MEIA was approved on the 1st of August, Mara Rosa is progressing on time on budget. Once we got the Inmaculada permit, we have restarted the brownfield exploration program at San Jose at also Inmaculada. And as I said at the beginning, the leadership transition is complete. So we consider that we are in a position ready to deliver sustainable growth. If we can go to Page #4, please. We have a very strong half ESG scorecard. I would like to remark the historical low in the lost time accident. I mean we got 0.84x, which for underground mines is a world-class level. And on this severity index is also very, very low, it's around 32. I would also mention that our ECO score is at a very good level, 5.89 out of 6. And also, we are still working with the communities, 53% of the workforce are coming to local communities. And we have spent $119 million on 2022 on the local procurement. As you can see on the right-hand side of the page, we have been increasing the latest score on the rating agencies. I mean, 5 out of 6 has improved. So this is a significant progress on the ESG. Now I'm going to pass the presentation to Eduardo Noriega for the financial results. Thanks, Eduardo.

Thank you, Eduardo. On Page 6, we're having here the results of H1 2023, a robust set of results given the challenging environment we had in the period due to a delay on the approval of Inmaculada MEIA. Revenues were $314 million, and we recorded an attributable net loss of $1.9 million and an adjusted EBITDA of $99.5 million. Variations versus the previous period H1 2022, start with revenues being 10% lower than the previous period, mainly as a result of the scheduled lower production but also a delay on the approval of MEIA of Inmaculada and lower silver prices, which effects were partially offset by higher gold prices. Cost of sales increased by 4%, mainly due to temporary changes in inventory, higher depreciation and lower production, as explained in the revenue line. Exploration was lower mainly due to the cash optimization measures that we took regarding the delay of the Inmaculada MEIA, but also we didn't have expenses in Snip, which were accounted in 2022. Net interest were lower mainly due to lower FX transaction costs in Argentina. And also, I would like to highlight in the income tax line that it includes the special mining tax and royalties in Peru, both accounting for $2.7 million. And we also have an FX impact on the deferred income tax from the evaluation of the mainly Argentinian peso of $1.9 million. We also recorded exceptional items in the period for $48.3 million mainly in our noncore assets, Azuca and Crespo for $42.3 million associated to market conditions and inflation. Also in San Jose, we're incur an impairment of $17.4 million due to in place local inflation and increase in country risk in Argentina. The -- and we recorded an impairment in Aclara due to the higher perceived risk due to the permit delay and the impairment was $7.2 million. But then we had a positive effect from tax of $18.6 million. If we can go please to Page 7. The cash recorded by the end of the period was $94 million, starting from $144 million. As you will see here, we had a strong generation from Inmaculada with $63 million. San Jose contributed with $11 million of cash generation. In Pallancata, we used $9 million. Brownfield programs accounted for $11 million and corporate expenses, $18 million. We paid $5 million of taxes, mainly royalties and corporate social responsibility, taxes in Argentina. Under current maintenance and closure, we used $8 million, $9 million of net interest, and we had a positive working capital and others variation of $2 million. As you will see, most of the cash was used to develop the Mara Rosa project, a project in which we invested $67 million in the period. On Page 8, our all-in sustaining costs for H1 was $1,572 per ounce of gold, and we are increasing our guidance as shown in this slide from $1,370 to -- from the -- I mean, the range is increased from $1,370 to $1,450. Now that's the original range. And the new range is $1,490 to $1,580 per ounce of gold. This increase is mainly a result of the delay in the approval of Inmaculada MEIA. But also, we decided to accelerate the min development CapEx in San Jose by $11 million this year. As you can see, Inmaculada's all-in sustaining cost is impacted by lower production, which dilutes our fixed cost among lower ounces, and this effect is partially offset by lower CapEx that we expect for the year. In San Jose, we had $21.5 per ounce of silver and in the -- and we expect -- in the second half of the year, we expect to have lower all-in sustaining cost than what we had in H1. In Pallancata, also for -- in the second half of the year, we're going to have as lower all-in sustaining cost, and the revised guidance you show in this in the last column of each of the mines presented in the slide. If we move to Page 9, our capital expenditure for the period was $62 million in other operations, and we're increasing our guidance from $125 million -- from the range $125 million to $135 million to revised guidance of $131 million to $140 million. The CapEx, in general, the CapEx has been increased mainly associated to the accelerated CapEx in San Jose on $11 million, and this effect was partially offset by lower CapEx in Inmaculada, a CapEx that will not be -- we will not be able to execute the full amount or really scheduled due to the delay in the Inmaculada. In H1, as you will see, our all-in sustain -- our CapEx, sorry, is lower than what we will have in our -- in the second half of the year, mainly due to a major delay, but we have a plan to recover most of CapEx originally scheduled. The Mara Rosa construction CapEx is -- has not changed. It remains at between $100 million and $110 million for the year. And for the period, the total CapEx recorded was $65 million. These capital expenditures do not include the exploration of -- our exploration budget, which is around $20 million for the year. If we go to Page 10, the company continues using its balance sheet to finance its near-term growth. The -- in Mara Rosa, we have executed $127 million of CapEx under $73 million remaining CapEx for completion. We have $94 million of cash and we have an existing debt of $300 million as of June 2023. We have an additional $200 million debt facility which give us flexibility to keep -- to complete the construction of Mara Rosa. I have to say that in August 2023, we draw down $60 million from this facility, which is a 5-year facility with 2 years of grace period at a rate of SOFR plus 2.05%. We also executed hedges for -- that will support the future cash flow of the company. Those represent close to 10% of our total production per year at a very interesting prices. You will see there that our hedge prices both from -- for gold, go from $2,047 per ounce of gold all the way up to $2,206 per ounce of gold. On Page 11, we have our 2023 revised guidance. I referred in our -- in the previous slides. As you will see, most of the changes have to do with the delay on the MEIA affecting our production, and therefore, our only sustaining cost, Inmaculada and our decision to accelerate the development CapEx in San Jose. With that, I will turn to Eduardo Landin.

Thank you, Eduardo. Okay. We're going to Page 13, please. What we have in front of us is an exciting future for the company. With Inmaculada MEIA have been approved for the next 20 years, does represent a huge potential to explore in a very impressive area. Then we have Mara Rosa first production in H1 2024 on time on budget. And of course, we have Royropata, new discovery. This is a fantastic discovery, totally open, and waiting for further permits to be drilled in the new area. I would say that this is an undervalued near-term growth story that I'm going to tell you in the next slides. Well, first of all, we have Inmaculada, Page 14, please. We have Inmaculada MEIA approve for the next 20 years. And as you know, Inmaculada is our flagship assets. It's been producing stable since 2015 with a production record. As Eduardo Noriega mentioned, 2023 was impacted by the permit delay, and that's the reason we have already presented our revised guidance. The good thing is that we have a strong potential to increase production and reduce costs with high-grade resources. If we go to the next page, we can see the other operating mines. We have Pallancata. I mean, Pallancata, as I said, the future of Pallancata is Royropata, and we will be working to get that permit. And the idea is to put this unit on care and maintenance probably on Q4. San Jose, as you know, we have been operating that mine since 2007 with a very, very impressive grades. And there is an upside in Argentina now that with the Argentina elections, we will have an improvement of the economic conditions, i.e., devaluation and a reduction of inflation. If we go to Page 16, please. We have the Mara Rosa Gold project, which is close to production. Let me give you some highlights. The Mara Rosa project is located in Goiás, Brazil. It's a very mining-friendly jurisdiction. The project has a very robust economics, especially at these prices. And we are planning the first production on H1 2024. Also, we have -- I mean, we have a very big land package, and the idea is to optimize and explore to extend the life of mine and also improve the project economics. To give you some life-of-mine details, the initial life-of-mine is 10 years, we will be producing an average of 80,000 ounces of gold, but on year -- I mean, from year 1 to year 4, we will be producing 100,000. The all-in sustaining cash cost average for the -- I mean, for the life-of-mine is $1,000 per ounce. We have an initial CapEx of $200 million. And as I said, we will be on time and budget and a sustaining CapEx of $40 million. The NPV at $1,600 gold is between $150 million and $160 million. And the IRR at that price is between 18% and 20%. So a very impressive project economics. And talking about reserves and resources, in reserves, we have 24 million tons with 1.2 average grade which represent nearly 1,000 ounces of gold -- sorry, 1 million ounces of gold. If we can go to Page #17, the current progress of the Mara Rosa project is 92%. As I said, we are progressing on time on budget. We have all the equipment at the site. We have studied the pre-stripping. The dry stack construction is already started also. The good thing is that on health and safety, we have been able to accomplish 3 million hours without 1 lost-time accident. That's really for a project is very, very impressive. And we have our ESG program. I have to say that we will have 320 people employed from Mara Rosa and Amaralina towns, which are the closest towns to the project. At the end of this presentation, I'm going to show you a video on the progress of the project. So you will see how advanced it is. If we go to the next page, Page 18, please. You can see the impact in the portfolio that Mara Rosa represent. In terms of reserves, we nearly doubled our reserves that represent an increase of 75%. If we compare production, I mean, the estimate production on '23, and we consider that we will have on '24 the same production. In theory, our production with Mara Rosa will be around 395,000 ounces of gold. And the all-in sustaining cash cost that at the moment is around $1,500. Mara Rosa will add this production with an all-in sustaining cash cost of $1,000. So this is very good news in every sense. If we go to Page 19, I would like to give you some color on our exploration in the Southwest Peru cluster. As you can see on the map on the right-hand side is a geophysic map. The map represent 30 miles per 30 miles area. So it is a very big area. We have been producing from this district from 2003. We have produced 3.4 million ounces of gold from Inmaculada, Pallancata and Selene. We have a very strong potential to discover a significant additional ounces. I mean, Royropata has already at 0.6 million ounces of gold and we have further targets like Eduardo Belt, San Francisco, Royropata and Condorillo. So this is a great district and is a real strength on the Hochschild portfolio. If we go to Page 20, you can see there the potential exploration areas for Inmaculada. We have the Eduardo Belt which if you can see on the map, we have the fault Eduardo and the fault Lita. We have already discovered the Angela Northeast resources, and we know that we can have Josefa, Lia, Luz, Laura and Mila as additional veins similar to the ones that we found in [indiscernible]. So just to give you an idea, during 2019 to 2021, we have discovered 1 million ounces of gold in this area. So plenty of potential targets for 2023 and is something that we have already started. If we go to Page 21, we have Royropata, discovery at Pallancata. I mean it looks like a long-term area. This area has already 51 million ounces, but we consider silver -- but we consider we would have minimum another 50 million ounces of silver. We expect to get the drilling permits on May 2024 to start doing exploration and try to bring more resources to the area. Also, we have another structure called Bolsa, which is on the left-hand side of the map, and that's a new area west to the Royropata, and that also has a very impressive potential. If we go to Page 22, we can get in the detail of Royropata, as I said, we have already 51 million ounces of silver equivalent that's already in place. That means that we will increase Pallancata resources by 108%. The mineralization at Royropata is very impressive. We have 5 meters width and nearly 900 grams of silver in that area and that means it's a fantastic rate, and that could lead us to use massive mining method with very, very low cost. At the moment, we are doing the permit, yes. I have to say that if we compare this permit with the one at Inmaculada, this area is smaller, yes. We have in place a PMO structure, so project management office to deal with this permit. And also all the lessons learned that we -- I mean, learned from Inmaculada, we have already implemented on the strategy to get this permit. One of them is that we should work with only 1 consultant for the environmental alone and also for the engineering studies. And in this case, we chose Ausenco, which is a very well-known international engineering company. As you can see on the graph on the right-hand side, from '26, '27, we could restart the Pallancata operation, accounting with Selene plant. And now that we're going to go care and maintenance, of course, we are going to maintain the mine -- dewatering the mine all the time and to try to keep that in order. Down the page, you have the resources. I'm not going to get in that detail. But I mean, there is an increase in the resources with an average grade with much better average grade, which is the result of the discovery. Finishing with the Peruvian mines, we can go to a Volcan. As you know, Volcan is located at the Maricunga Belt in Chile. I mean, it's a place where -- I mean this has been producing 100 million ounces of gold in the past. There are several operating mines and there is some support on the infrastructure. We believe that Volcan is a really good opportunity is -- I mean, we have a Volcan project 9 million ounces of gold with an average rate of 0.6. We recently finished a PEA and a 43-101 updated of our resources. The result is good, yes, but the CapEx is around $900 million. So we believe that it's not the opportunity right for us based on our capital allocation. And that's the reason we decide to look for strategic alternatives through M&A or to sell the project or to do an APO, that's things that we are looking for. If we go to Page 24, well, in this page, we can see that the valuation of the Hochschild share at the moment is very low. Here, we can compare ourselves at the enterprise value versus EBITDA is 2.4x for us. As you can see, Fortuna, Centamin, Coeur, Fresnillo has a bigger ratio. Price to NAV exactly the same. We are 0.7x. There is plenty of mines, I mean, companies that has better. Free cash flow, we have 18.6%, and there is companies that has -- I mean, Fortuna has higher. So with Mara Rosa completion, we believe that there is the opportunity to re-rate the value of the company. I mean, at the end of the day, we have the MEIA approval. We have Mara Rosa that is close to production, and then we have Royropata, and that's 3 excellent opportunities to develop the growth strategy of the company. In summary, Inmaculada MEIA approval, 20 years ahead to do exploration in a very impressive land package. Mara Rosa close to completion, Royropata set to deliver medium-term growth, we believe that we are on the borders of the mineralization. So there is a huge potential there. At the moment, highly compelling valuation. The leadership transition has been complete. I feel ready for the growth. And also, we will have a Capital Market Day in November, where we will present the strategy of the company. And of course, we will try to present some projections that we know that the market desire. That's all for me. We will now play the video of Mara Rosa and of course, we are available for any questions that you might have. Thank you very much for your attendance. [Presentation]

[Operator Instructions] Our first question comes from Richard Hatch from Berenberg.

A few questions. First one, are you able to give us any kind of steer on 2024 volumes at this point just given the fact that you've given us updated guidance for the balance of '23. And are you able just to give us a bit of a steer on that? That's the first one.

Well, the thing is that we are planning to present that in the Capital Market Day in November. At the moment, we are working on our budget also on the strategic development. So I will not be able to give you that data at the moment. But saying that, I mean, I would say that production-wise at Inmaculada will be more or less at the same level. Mara Rosa is really depends on which states we will be able to start production during H1. But I mean, let's say, that we will be able to produce around 6,000, 7,000 ounces of gold per month, yes. So it really depends on when we finish the project. Pallancata will be on current maintenance and San Jose, we expect to be at the same level of today.

Okay. That's all really helpful color. The second one is just on the permitting at Royropata. I mean it sounds like you've kind of learned your lessons from Inmaculada. I mean are you confident of the time frame of what you've put down just given the sort of the challenges that you've had with Inmaculada? And also the kind of steer of volumes from sort of 2026. Is that again something which you feel sort of confident that you can deliver to the market?

Yes. Let me say something. First of all, the Inmaculada MEIA is a huge area, and it's been a huge effort from the company, I mean, to get 20 years permit. We cannot compare the land package of Inmaculada with Royropata, it's much smaller. And of course, we have applied the lesson learned from Inmaculada, of course. I mean, we can say that we expect to have around 3 years, yes. But that really depends -- I mean, it depends on our work, but also depends on the Peruvian government. We've been talking to the Peruvian government, and they have the best attitude with us, and they know that we are pursuing that permit. But at the end of the day, it's something that -- they will play a fundamental role on this permit. So our best estimation is 3 years, and we believe that it's achievable. But let me say that, I mean, again, I mean, it's dependent on us, we will do our best. We already implemented every single thing to do the best we can, but it's really depending on the government. So I would say that -- that's the current situation.

Okay. Good luck with it. The next one, just on Volcan. Just on the 1.5% royalty for $15 million that you signed with Franco, just to clarify, when should we expect that to hit the bank? And is that just an example of you just trying to create a bit of value from this noncore asset?

Let me pass this question to Eduardo Noriega, please.

Richard, and thank you for that question. On Volcan, the money is already in escrow. So we are just waiting for the registrars in Chile to register the royalty, and it should be fairly shortly that we received that cash.

Okay. Cool. And then while I've got you Eduardo. My last question, just on Mara Rosa CapEx, can you just help me with the math on it? So you spent $65 million in the first half of this year. I think the results a $54 million remaining CapEx expenditure in H2. But I think the guidance is unchanged at $100 million to $110 million. So on my math, that means that your H2 spend should be $40 million, not $54 million. Can you just help me square that, please?

Thank you, Richard. From that we recorded in Mara Rosa of $65 million, actually, construction CapEx is $58 million roughly. The rest is capitalized expenditures, expenses mainly finance expenses that we can capitalize according to IFRS rules. So the remaining CapEx for this year is around between 13 to 24 -- sorry, between $47 million and $58 million that we would be expecting to incur in the second half of the year. The remaining CapEx will be completed in 2024.

The next question comes from Ian Rossouw from Barclays.

Just a question on Pallancata. Could you give an estimate of what the sort of one-off closure costs would be that you expect to incur this year? And then what the ongoing care and maintenance costs would be going forward until you restart?

Thank you. On Pallancata, our estimated annual care and maintenance cost is close to $6 million per year. And then we expect closure costs, meaning a temporary closure cost, mainly of $8 million roughly.

Okay. And will all of that $8 million to be incurred this year, if you close the asset?

The $8 million, yes. The $6 million, no, it's annual. So it will be only a portion of it that will impact the 2023 results.

Okay. Perfect. Understood. And then just on -- how should we think about the costs down the line, you said obviously 3 years for the license at Royropata, I mean how should we think about potential restart costs? I mean, obviously, mine development, but is there any incremental cost for the plant that's required, et cetera apart from working capital?

Yes. The -- I mean, the fact that we are going to spend $6 million on care and maintenance, that would mean that we'll maintain the mine, I mean, ready for operation, that would include maintenance for the plan and also dewatering the mine. So I don't expect to have any extra cost to restart the mine. Of course, once we finish the engineering, we will have the amount of developments and all the infrastructure that has to be done in order to get to production. But that will be part of the information that will, I mean present during the Capital Market Day. It's something that is -- I mean, the engineering is under development, and we don't have the figures yet. And -- but I expect to have that in November. But what I can say is that, I mean, with that grade with that [ week ], it will be a very, very attractive cost.

There are currently no further questions in the phone queue. [Operator Instructions] And we have a follow-up question from Ian Rossouw from Barclays.

And just one on Argentina. Could you perhaps just give us an update on what the sort of current situation is around exchange controls, I guess, the ability to take funds out. I mean what's the sort of losses you're currently incurring to take money out of the country, I guess if you need to buy government bonds?

Thank you, Ian. So in Argentina, what we have seen in the last couple of years is a net inflation situation, our inflation -- local inflation has been higher than the valuation, and that certainly has put the country in a difficult situation. And for us, of course, costs have been increasing in the last years due to that situation. Right now, the cash that we are generating in Argentina, we are using it to repay local debt that we have working capital debt. We are generating cash. We are not converting -- we're not buying dollars to send them out of the country so far this year. That -- to do that, you need to access the secondary market, which we haven't done. But we know that the cost to do that is close to 50% of the amount that you are planning to send out. Now there are elections, as you probably know, there are elections coming and the market is expecting a change, a significant change. All of the candidates have expressed in their plans, their interest to resolve to have a more permanent solution to a situation in Argentina, and we have different flavors within those candidates. I guess, in the best-case scenario for exporters like us, a devaluation is expected -- strong devaluation is expected in the coming months or years. But again, that will depend on the results of the election. We do see upside in Argentina if -- when a new form takes place.

Thank you. And as there are no further questions in the phone queue I will hand the call back over to Charles for any web questions.

There are no questions yet on the webcast, apparently.

Okay. Thank you very much for your time and your attendance. Let me say that we'll be on the Capital Market Day in November. We will present the growth strategy of the company. In the next months, we are going to work very hard on our budget and our strategy and operational plan. And again, thank you.