Hochschild Mining plc (HOC) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Hochschild Mining plc. Investor Presentation. [Operator Instructions] I would now like to hand you over to Eduardo Landin, CEO. Good afternoon, sir.

Good afternoon, and welcome to the Capital Market Day presentation today. Well, let me tell you that we have been working on this presentation and on the budget and the guidance for the past 3 months and now is ready. We have defined a new strategy that clearly will focus on the core business also to increase production and lowering costs. If we go to the next page, first of all, let me introduce myself. I am Eduardo Landin, I'm a mechanical engineer by training. I am in the company, in Hochschild Mining for the past 17 years. And since August, as you probably know, I became CEO of the company. Let me go to the next page to this one. First of all, why I would say that Hochschild is a compelling investment case. Well, first of all, today, we have our Inmaculada, our flagship mine, which is permitted for the next 20 years. We have established that we will be able to produce 200,000 ounces of gold per annum, that will be the production base. Also, the cost is set to fall down substantially from Q4 2024. We have a very impressive and significant exploration upside. And today, the Peru government is promoting mining. So things are going, changing in a -- very good wins for the company. Once we have Inmaculada, we should go to the next near-term growth opportunities. As you can see in the map, in Brazil, We have Mara Rosa. Mara Rosa is a new mine that we will have the first gold pour at low-cost mine in Q1 2024. And then we have also close to Inmaculada, Royropata deposit, which is a new low-cost mine also that it will give us 100,000 ounces of gold. And all this will be done with a very strict capital discipline. This capital discipline will be focused on repay the debt, also finance the growth and, of course, to make sure that we have some capital returns to the investors. If we go to the next page, then you can see what happened in the last 3 years for Hochschild. Let me go to the external headwinds that we have at the beginning from 2020 to 2023. As you may know, we have COVID. All mines were closed for 2 months. Castillo then become President and the Prime Minister announced that 2 of our mines in Ayacucho will be closed. Then the Congress removed Castillo from power and there were nationwide protests and disruption. And on top of that, we have Argentina with inflation above 100%. The unofficial peso rate was or has been 3x versus the official rate. In the meantime, what we have been able to do from 2021 to 2023, we acquired Amarillo and start construction of Mara Rosa gold project. We also discovered Royropata which is a 51 million ounces equivalent of silver. It's a high-grade resource. We demerged the TSX, the Aclara on the TSX and we retained 20% stake. And then we have the Inmaculada environmental permit approval and mine developments and exploration restarted. Also, we have the HOC leadership transition. Today, we have a new CEO. We have a new CFO, and we have a new COO. But the good thing about this is that all of us has been in the company for many years. We have the experience and we have the history, and we are ready to implement this new strategy. What do we have for the future? Well, Inmaculada, the permit for 20 years; Mara Rosa, the first production in Q1 2024; Royropata, we already started with a permitting process. The brownfield program has already started in all sites, exploration potential that we have across all operations. What I said about the disciplined capital allocation. And of course, we want to establish an exit strategy for noncore assets. What will be the focus of the management for now? Well, first of all, let me tell you for the noncore assets. As I said, Aclara, the rare earths business in Chile, we demerged, and we kept 20% interest on it. Snip in Canada, we terminated the option in April 2023. Volcan in Chile, we are looking with Canaccord strategic options like selling the asset or an IPO. Also, we have designated as noncore assets, Crespo, Azuca and Arcata in Peru. What do we need to focus on our core assets in Latin America? Inmaculada. As I said, the flagship Peru asset with 20 years permit extension; Mara Rosa the new 10-year Brazil mine; Royropata, the new high grade in Peru project; and San Jose that we know is a high-grade mine that has an impressive track record on replacing resources since 2008. Our new strategy will be focused on 4 keys from key drivers. First of all, brownfields, generating the long-term value, extending the life of mines, and I want the team, the brownfield team to focus on mineable resources. Then we go to ESG. ESG means driving responsibility and respect. We have today a world-class safety performance. We have established the 2030 ESG KPIs and they are in place, and they are in line with the global goals from the United Nations. And we have also stated that in 2050 we will be net zero carbon emissions. Going to operational efficiency. I want to implement a lean philosophy across the company. We will introduce process optimization with the help of third parties on our [ life of ] mine processes. We have proven in the past that we know how to develop projects on time, on budget. And the fourth driver, it will be the disciplined capital allocation, funding, of course, the organic growth, paying the debt, having some capital return for shareholders. And of course, if we do any M&A transaction it should be value accretive. Let me now present you what it would be our projections for production and for the cost, for all-in sustaining cash costs for the company for the next 3 years. As you can see, if we compare the figures between 2023 and 2026, we will have a growth of approximately 25%. The important thing is that in 2027, if we got the permits of Royropata, we'll restart our unit of Pallancata, and this unit will produce another 100,000 ounces of silver -- of gold, sorry. If we go to the cost, as you can see that we are planning to reduce the cost by 20%. Therefore, I would say, that we expect a very strong cash generation in the next 4 years. What is our -- one of our competitive advantages? Well, today is our proven development expertise. This is not very common in the sector, in the mining sector, but since 2006, we have been able to develop, construct 5 mines on time, on budget. We consider ourselves specialists in operating midsized underground mines. And of course, we have demonstrated also that we know how to operate open pit in Moris in -- back in 2006 (sic) [ 2007 ] in Mexico. And we are demonstrating open pit operations in Mara Rosa in Brazil. And also, I would like to tell you why we are considering ourselves, a leading operator in Latin America. Well, first of all, we have a solid reputation. We have been working on underground mines for 50 years across Latin America. Safety has always been a top priority. And today, if we compare our results with the ICMM first quartile, we are #1 in underground with very, very low frequency and severity rates. Also, we have a very experienced, in-house technical service professionals and operational excellence teams specializing in a variety mining methods and mineral processing flowsheets. We have a strong record on delivering sustaining capital projects also on time, on budget. And what we are very good on is to identify innovations and implement those innovations that we can find across the industry. For example, today, at Inmaculada,we are implementing telemetry, ventilation on demand and artificial intelligence systems for pumping water. Also something really, really important in the mining sector is planning, short time and long-term planning and the use of state-of-the-art mining tools like, for example, Deswik is something that it will give us a lot of planning expertise, and that's the way to get the best out of the mines. Going to brownfield exploration. Here in this slide, we can see what we have done in the past years. No sorry, sorry, this is the future -- it's a shorter version of the presentation. Let me tell you what is the future. Yes. The cost of bringing an ounce of gold through brownfield exploration is only $44 per ounce of -- I mean per ounce. And we have achieved from 2016 (sic) [ 2015 ] to '22 to bring in the company 3.5 million ounces of gold. We are projecting in the next 7 years between a conservative scenario and an upside scenario that we could go from 3.9 million to 5.2 million ounces. Going to Inmaculada, looking the same figures, you can see that between 2016 (sic) [ 2015 ] and '22, we have been able to bring 2.4 million. And we believe that only considering near mine, we will be able to bring between 2.1 million and 2.9 million ounces. These figures doesn't consider regional exploration upsides. This is solely near mine. So I would say that we will have the possibility to bring much more resources than the ones that there are in these tables. Let me tell you about Peru today. But today, Peru is a different environment. The person is in the picture there is Mr. Otárola. He is the actual Prime Minister. And he has been actively promoting mining. He was at the PDAC in Canada. He was in PERUMIN. They have already established a delivery unit at the Ministry of Economy & Finance to guide permitting the key investment projects. And also, they have demonstrated the ability to give permits because in less than a year, they have -- I mean, they gave Zafranal the new permit Inmaculada, our permit and Toromocho for Chinalco. Also, they have launched several initiatives to streamline mine permitting. They have today a high-level commission led by him. They have a single permitting platform for mining permits. And they are working in different procedures in order to simplify environmental permitting and prior consultation process for exploration. I will say that today, Peru, yes, is -- it has political stability and is open to business, and we have a pro-mining environment and the social context has also improved dramatically. Going to Inmaculada. As you know, Inmaculada is our flagship mine. It's located in Ayacucho, it is an underground operation that commenced in 2015, has beaten the guidance every year since commissioning, we got this MEIA, new permit for 20 years in August 2023, and we have a very impressive large regional land package that still has to be explored. What are our projections for Inmaculada? Well, first of all, we will have a production for the next 3 years or around 200,000 ounces. And if we go to see the all-in sustaining cash cost, we will be around $1,350 average. But if you look the column on the '24, we have $222, which is CapEx that was deferred from years 2022 and 2023. See, we didn't have the permit. We stopped doing development, we didn't expand the TSF capacity. And in 2024, we are going to invest $45 million on TSF expansion, waste rock facility. We are planning to install reverse osmosis plant that -- it will give us an extra capacity at the TSF. And also, we will recover mine developments during this year. Also, we have in place some initiatives to reduce costs. First of all, is to increase extraction from the recent permitted area in order to eliminate plant spare capacity. Also, we want to increase the mechanized mining methods in -- across the mine. And also, we want to improve productivity. In this page, what you can see is a significant opportunities on the brownfield program. Let me show you in the middle of the map, you have those red lines, which are the current veins. The new MEIA has given us this extra area that is, I mean, where in the short term, we need to -- we have the priority to maximize the life of mine. We have a plan yet to add between 0.5 million and 0.6 million ounces of gold with more than 500 grams per year in the next 4 years. And the key areas of drilling is the new Eduardo well that is there, Angela South, Angela East and Angela West. I think the importance of this map is that we have been producing from 2015 until today, and the only area that has been mined is the one at the center with the red lines. So the potential exploring in this area is huge. And that's the reason -- I mean, we are talking about 20 years of potential exploration in this total area. Let me tell you about Royropata. Well, first of all, let me establish that Royropata is a deposit that is in the Pallancata area. So Pallancata, as you know, is located in Ayacucho. It's an underground mine that has been operating since 2007. We have this major discovery called Royropata, and I will tell you about that in the next slides. Today, we need to stop operation and going on care and maintenance, we need to spend $6.7 million on care and maintenance until Royropata become in production in 2027. And we -- unfortunately, we have one-off employee termination costs of $8 million. The reason why is because we don't have the permit to get into the area of Royropata. But once Royropata will be in production, we will use the whole infrastructure of Pallancata, the plant and all the infrastructure camps, roads, electrical, everything, everything will be used. In this slide, you can see what is the meaning of Royropata discovery. It is a discovery of 700,000 ounces of gold. This discovery, it has very strong economics. Also, it has the geological potential to double resources to a similar quantity, so we could be talking about 1.4 million ounces of gold. And we have already studied the engineering studies and the environmental studies in order to complete the new environmental permits. This resource, the 700,000 ounces is 3 million tons. It has a very good grade, 1.9 gold, 515 silver and the average width of this mineralization is 5 meters. What does that mean? That we can apply mining methods, I mean, massive mining methods that it will give us a very good all-in sustaining cash cost. On the table, on the right-hand side, you can see the key metrics. And we are planning to start production on 2027. The average annual production will be 100,000 ounces. Initial CapEx is very low since we have all the infrastructure in Pallancata. We will be spending around $60 million. And the average all-in sustaining cash cost for these 700,000 ounces, it would be between $1,000 and $1,100 per ounce. With all these key metrics, the pretax IRR it will be between 45% and 55%. So a very, very attractive opportunity for Hochschild. If we go to the area where we have this discovery, is totally open. I mean near-mine exploration is aiming to discover additional 50 million ounces. That's another -- I mean this is in silver. But that's another 700,000 ounces of gold in the Royropata Belt, which is on the left-hand side of the map. And between 2024 and 2027, we don't have only Royropata well, which is the Marco extension, but we have also Pacapausa system. We have Pallancata Northwest and we have Yanacochita and Bolsa. So then again, on top of this possible 1.4 million ounces of gold, we have several areas where we can increase resources once we deplete the original resources. Let's talk now about Brazil. Well, Brazil has been a great surprise for us. We believe that today, the economic stability of Brazil with the new Lula government is great. We also [ depend ] strong from the federal government, and we have received -- I mean, we feel that we have a lot of support for the mining business. Mining is permitted at that level and regulated to a state level. The state of Goiás is a key mining-friendly jurisdiction that has been always. And all the Mara Rosa -- the new project permits are granted on time. We have excellent infrastructure. I mean we have the town of Mara Rosa, the national roads, is connected to the national grid. So in terms of infrastructure, we are extremely happy with the area. And going to the most important thing, the people we have today in place a very experienced and professional local senior management that is in charge of the project. We feel that there is a huge amount of qualified workforce available close to the project. We have regional contractors that they have demonstrated that they are really good in construction and also extremely good on safety. And the good news about all this is that the community is extremely friendly and recognize the benefit of the project. So I would say our experience in Goiás, on the state of Goiás has been very positive. Mara Rosa in figures is located in Goiás. As I said, it's an open pit mine. We have a 10 years life of mine. We have opportunities to identify new resources in order to extend the life of mine and increase the economics. And we have also the potential to increase the plant capacity. Today, we are planning to have an average production of around 100,000 ounces of gold for the first 2 years. And as you can see an all-in-sustaining cash cost of around $1,000 per ounce. On this page, what you can see is the effect of Mara Rosa in the whole portfolio of Hochschild, we have increased reserves by 75%. We will be increasing production by 34%, and our all-in sustaining cash costs, it will be reduced by the fact that Mara Rosa is coming with all-in sustaining cash cost of around $1,000. Today, in Mara Rosa, the project is 99% complete. Everything is nearly ready. The only thing left is the electromechanical assembly that we have at 89%. And I have to mention, and I mentioned before that we have been able to accomplish 4 million hours without one lost-time accident. The operational permit is already filed. And we have also a very powerful ESG program that including a lot of visits to the knowledge trail. That's something that we implemented at the beginning and it's very, very interesting. We have all the schools around visiting the project. We have purchased from local suppliers more than $9 million, and we have 320 people working from Mara Rosa and Amaralina, and they will stay working with us during the operation. So the impact of this Mara Rosa project has been really, really good on the villages around. This is the schedule for the project. Everything is nearly complete. As you can see, the electromechanical assembly, it will be finished on Q4 2023. We have already started commissioning and start-up, and we are planning to have the first pour gold in Q1 2024. And if everything is going well. Commercial production, that means 70% of the capacity of the plant in production, it will be on Q2 2024. So we are extremely happy with this project. It's a new mine for the Hochschild portfolio. it's bringing 100,000 ounces with an all-in of $1,000 per ounce of gold. Also, we have some near-mine programs in place to -- I mean, to discover new resources. We believe that we can bring a new 1 million ounces of gold. And in this page, you can see that we have Pastinho. We have Caxias, we have Maia, we have different targets that we will start exploring in the next few months in order to be able to replace the production that we deplete from the Posse deposit. And now let's go to Argentina. We have San Jose. San Jose is in the Patagonia in Santa Cruz province. It's an underground mine that we started up in 2007. Today, we have additional resources and potential drilling plan for San Jose district in order to bring new resources. We have demonstrated in the past 15 years that we have been always able to replace resources in order to continue with the production in San Jose. And in this page, we have San Jose forecast, probably you are asking why we are lowering down production in 2024. And that was planned in our life of mine project because we have the areas that we are getting into, they have lower grades. But in 2025, we are planning to increase again production up to 130,000 to 140,000 ounces of gold. Also, we have some plans in order to increase production. We have some open pits, small open pits around the mine that we want to put in production. We are evaluating at the moment to increase the plant capacity by 15% with a very modest investment. And we have a program in place to increase local employment and, of course, enhance operational skills. If you can see the cost even that we have reduced the production projection for 2024, we have been able to keep the all-in sustaining cash cost in 2024, the same level of 2023. And we are planning to lower down that all-in sustaining cash costs in 2025. Everybody knows that we had elections last Sunday in Argentina. We have a new candidate that he has said in several occasions that he is pro-mining, pro investments, and he is planning to devaluate the currency. If he is able to do that, we don't have inflation, I mean we would expect to have a very impressive impact on costs, seeing all our costs, I mean, I would say, between 80% and 85% of our costs are in pesos. So let's say that today, we have an official exchange rate of [ 350 ], the unofficial is around [ 1,000 ]. That means that we could -- I mean, if we would go to the -- an official one, we could divide our cost by 3. So I believe that there is a very impressive opportunity in Argentina. On capital allocation, we have priorities to maximize the value creation. First of all, investment in current projects, we need to finish construction, permitting and the work of engineering. Also, we want to put the money on brownfield exploration. We have said that we have the ability to bring new resources through brownfield, so that should be a priority. The debt repayment is also a priority, disciplined debt levels to further deliver growth should be in place. Also capital return and in distribution from investment cycles and M&A should have clear parameters to evaluate the opportunities. Going to our approach to ESG. Let me start with health and safety. I mean, safety for us is the first priority that we have in the company. And we have been able to reach a frequency index of 1 after many years working with DNV. Today, we are the only company in the world that has DNV Level 7, and we are working to get level 8. Also, another aspect of ESG is empowering people. I mean, we work with the people. We train our people. We take care of our people, and we are very competitive with them. Then, of course, serving our communities is something that we need to focus, especially in Peru that -- I mean our communities around the sites, they have a lot of needs. And unfortunately, the state -- I mean, the government is not as close as we would like. So we have 2 actions that we are going to do there. Of course, we are going to continue with our programs of health, education and communications, but also we want to work with the Peruvian government to make sure that they are closer to these communities. Of course, protecting the environment is a major priority for the company. And finally, guarantee that we are a very responsible business. This is the final slide, and let me tell you why I consider that we are a very good opportunity, a very good investment opportunity. Well, first of all, because we are going to be focused on the core business. As we said, noncore business would -- we'll put it aside. We will increase production and we will lower in cost. Today, we have a new management team in place, but this management has been in the company for 18 years. We have all the history of all the experience in order to implement this strategy. We have our flagship operation, derisk with the new permit, and we have 20 years ahead to get all the value from Inmaculada. We have the new low-cost mine in Brazil, which is very close to production. Royropata, the new discovery using all the Pallancata infrastructure, it will give us 100,000 ounces per year from 2027. We will continue doing brownfield. And with the track record of replacing resources, we will do the same and of course, try to increment our life of mine. Disciplined capital allocation is part of our strategy, and of course, ESG will remain the core of our HOC strategy. Thank you very much. And now we will pass to Q&A.

[Operator Instructions] I would like to remind you that recording of this presentation along with a copy of the slides and the published Q&A can be accessed via Investor dashboard. Edward, as you can see, we received a number of questions throughout today's presentation. And if I could just ask you to read out those questions and can give responses where it's appropriate to do so. I'll pick up from you at the end.

Okay. I will read the questions, and then I will answer them. The first question from Alessandro, it says, with precious metals prices firming, would you consider resuming of dividends? Well, the answer is, yes. We are waiting to put in production Mara Rosa and start getting cash flows from that operation. And of course, we will go back to our Board of Directors in order to propose to restart dividends. The second one is, given the extremely high all-in sustaining cash cost at San Jose, is the mine likely to come to an end pretty soon? Can things be turned around? Well, I have already answered that question with the slides. But I mean, we are planning to lower down costs in 2025 with current prices. And also, as I said, we believe with the new government, there is a possibility to lower down cost and also the possibility of expanding the capacity of the plant, it will give us also another possibility. So I don't think that we are planning to close San Jose in any way. Given the noise, the positive noise coming out of the Ministry of Mines, can we now seek to accelerate the development at Royropata? Okay. It's true that we are having very good opinions from the government, and they are totally pro-mine. But as I said, to get a new permit, a new environmental permit, we need to do the engineering studies and the environmental studies. Also, we need to go to field and do a wet season and a dry season. And then the SENACE, which is the authority, it will take more or less a year to evaluate the document that we'll be presenting to them. So I would say that best case scenario, it would be to get this permit in the next 3 years and start production in 2027. Can you expand on the operational efficiencies that you are planning to implement in the coming year? Yes, of course. We are planning to bring a -- I mean, to do a [ certain ] in the operation, especially at Inmaculada and to bring consultants by specialty, and we would like to analyze our mining cycles in order to try to lower down costs. Also, we have some plans and some projects in order to increase leaching capacity that will increase the recoveries, metal recoveries. Also, we have a project in order to increase the flow of oxygen to the leaching tanks, and that will give us also an increase on recoveries. And as I said, we are looking at possibilities to increase capacity at San Jose in order to be able to lower down the grade that it would -- I mean, basically, the cutoff grade in order to pass extra material through the plant. How do you plan to balance growth with disciplined capital allocation? That's a very good question. Well, basically, we would like to -- as we said, we would like to invest a good amount of money on brownfields because we believe that brownfield is a cheap form to bring new resources. Of course, we want to pay debt. And we will be very vigilant in order to -- if there is any opportunity in the market that, for example, the one that we have with Amarillo, we would like to repeat Amarillo. But of course, we are not going to increase debt at this point in time. First of all, we would like to consolidate the company situation, to have Inmaculada getting cash flows, having Mara Rosa getting cash flows. And of course, if we have San Jose with the valuation, also it will give us very good cash flows. And then once we do that, we can look at a new M&A opportunity. Will the additional exploration of gold at Mara Rosa increase the annual production or extend life of mine only? Well, when we did the engineering of Mara Rosa, we left some spaces to increase products, increase the capacity of the plant. So we know very much CapEx, we will be able to increase the capacity by, let's say, between 10% and 20%. So if that is possible, of course, we will try to increase the production from Mara Rosa from year 1. So that is the plan. But of course, we would like also -- I mean if we are able to go 120% is to find the resources we were talking about on the presentation of around 1 million ounces extra, in order to have a life of mine of, let's say, 15 years. That would be perfect for us. Then what does a good M&A opportunity look like? Well, the answer is Amarillo gold? Amarillo Gold has been a very good opportunity for us. I think we acquired Amarillo in a good price. And also, we have been able to deliver an engineering and construction on time and budget. So we believe that to repeat Amarillo, it will be a very good opportunity for us. And I believe that's another question. I believe that fresh elections are likely in 2024. Ddoes this represent a material risk? We don't have any elections plans for 2024. Elections in Peru would be 2027 or 2026. So we don't expect any changes in the political scenario in Peru for the moment. Okay. That was the last question

Perfect, Eduardo. I think you've actually addressed all those questions [ that come ] from investors. And of course, the company will [ more ] review all the questions submitted today, and will publish the response on the Investor Meet company platform. But just before redirecting investors, provide feedback which is particularly important to the company. Eduardo, could I just ask you for a few closing comments.

Yes, of course. As I said, in the conclusions, we are very focused on bringing value to the shareholders. I believe that we have had some headwinds in the past 3 years that it was a difficult time for the company. But during this time, we were able to reinvent ourselves, we acquired Amarillo. I mean we got the permit, so we have demonstrated that even in difficult times, Hochschild is able in all to give results. So I would like to ask the possible investor or the current investors to give us trust because we are a very competitive management team. We have a lot of experience and we have the history. And with those projects that I have presented to you, I believe that we can bring a lot of value to shareholders. Thank you very much. That's all for me.

Perfect. Eduardo. Thank you once again for updating Investors Day. Could I please ask investors not to close the session as you now will be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. It only takes a few moments to complete, which I'm sure will be greatly valued by the company. On behalf of the management team of Hochschild Mining plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.