Hochschild Mining plc (HOC) Earnings Call Transcript & Summary

Hello, and welcome to Hochschild Mining Q4 Production Results Call. I would now like to hand the call over to Eduardo Landin, CEO. Please go ahead, sir.

Hello, and welcome to our conference call to discuss our full year quarter production results. I'm here in Lima with Eduardo Noriega, our CFO; and in London is Charlie Gordon, our Head of Investor Relations. Group production in the quarter was just over 98,000 gold equivalent ounces or 8.2 million silver equivalent ounces, which is, once again, the strongest quarter we have had in all 5 years. Production rose a little versus third quarter and clearly shows the impact of a further rise in contribution from our new Mara Rosa mine as well as a strong last period at San Jose. Therefore, for the year as a whole, Hochschild produced 347,000 gold equivalent ounces, which is within our guidance once again, mostly due to the better-than-expected performance at Inmaculada. At Inmaculada, we continue to see the benefits from our optimization initiatives with -- in the quarter of almost 34,000 ounces of gold and 1.6 million ounces of silver, which is a gold equivalent total of 52,800 ounces. For the full year, the total was just over 220,000 ounces, which is a pleasing 8% improvement on 2023 when delay to the permit decision impact mine development and, consequently, production. In Argentina, San Jose delivered its best quarter of the year with output at 3.2 million silver equivalent ounces, which gives a full year total of 10.3 million ounces, which is slightly ahead of our guidance. Turning to our new Mara Rosa operation in Brazil. As you know, we reached commercial production in the second quarter of this year. And since then, we have seen the plant reaching 7,000 tonnes per day nominal capacity as expected and monthly production hit a peak of 9,700 ounces in December. Overall production for the year came at 63,700 ounces of gold, which was lower than original guidance due to the slower-than-anticipated ramp-up at the operation. In terms of the cost for the company as a whole, in 2024, due to the slower-than-expected ramp-up at Mara Rosa earlier in the year and continuing with high inflation in Argentina, we expect that all-in sustaining costs to be between 5% to 10% higher than our 2024 guidance, which is -- which, if you remember, is between $1,510 and $1,550 per gold equivalent ounce. On the exploration side, I am pleased to report that results from our brownfield campaign has been very strong in 2024, with our team expected to deliver a substantial addition to all our mines and project resources when we report our audited annual reserves and resources in March at the full year results. We remain in a good balance sheet position. We have approximately $97 million in cash, which translates of a net debt figure of $260 million and with a net debt-to-EBITDA ratio of 0.51, which has reduced quickly from almost 1x a year ago. We have also added further flexibility with our arrangement of a new $300 million medium-term green loan on improved terms. We will use it to repay existing loans and finance our future growth strategy. We have currently only drawn down $30 million of it. We have also provided for 2025 guidance today. In summary, we expect to produce between 350,000 and 378,000 gold equivalent ounces in -- at all-in sustaining cost of $1,587 to $1,687 per gold equivalent ounces. You can see the split of this forecast by mine in the release. Sustaining and development CapEx is set at between $169 million and $180 million, and the exploration value would be around $36 million. To sum up, we are proud of all the efforts our production team have made to deliver output in line with the guidance and can look forward to a busy year of work at Monte do Carmo and Royropata projects and the first full year of Mara Rosa production. With that, I would like to open up for questions. Thank you very much.

[Operator Instructions] And our first question is from Marina Calero from RBC Capital Markets.

Can you hear me?

Yes, very well.

I just have a quick question on your CapEx guidance. You are guiding for sustaining and development CapEx of $169 million to $180 million this year. Is there any part of that, that is CapEx not -- that was not spent in 2024? And as an extension of that, how should we think about your sustaining CapEx after 2025?

Thank you, Marina. This is Eduardo Noriega. Yes, there were some carryovers from 2024 to 2025, mainly with -- mainly in Inmaculada-associated projects that we were executing both with the tailings and expansion -- capacity expansion as well as the water treatment plant to dewater our tailings dam. So there is a portion, I would say, probably around between $10 million and $15 million that come from 2024 projects. So if you exclude those elements from the guidance, it speaks up how 2025 would look like with 2 projects related to this year. Yes. So that's the answer to your question.

Okay. And how should we think about sustaining CapEx after 2025?

For 2025, if you exclude those elements from the CapEx 2025. The rest of the CapEx is mainly sustaining CapEx. So around $150 million is an amount that would be used. Taking into consideration, of course, that our sustaining CapEx includes the development of new areas that we are finding in all of our operations in Inmaculada, in San Jose, Mara Rosa.

We'll now move to have our next question from William Dalby from Berenberg.

Can you hear me okay?

Yes, very well. Thank you.

Great. Yes. I've got a couple on costs and CapEx, mainly carrying on from Marina there with the first one. Yes, so first off, I'm hoping maybe you could outline the main drivers of the higher CapEx spend in Inmaculada specifically in 2025? And then maybe give a little bit of a steer on the more medium-term expectation for Inmaculada, say, '26, '27.

So as I said, we have projects for next year of around $30 million. So -- and from those $30 million, around $15 million are projects that were started in '24 and were not completed and were carried over to 2025. So we have capacity expansions of around $20 million for 2025. We also have a -- the construction of a water treatment plant in Inmaculada of around $10 million. And we also have some other projects that are more related to the 2025 onwards operation. I was saying that, let's say, from the guidance that we have, around $120 million is Inmaculada. So if you deduct what I just explained in terms of projects, you will have more or like ongoing sustaining CapEx for the mine.

And then it's fair to assume that the Inmaculada CapEx profile should start to come down '26 onwards. Is that fair?

Let me say something. As you know, I mean, we expand the tailings dam capacity every 2 years. Yes. So there would be years where we will spend between $20 million and $30 million additional. So I will say that -- I mean the figures that Eduardo Noriega said of $90 million, it could fluctuate from $90 million to $120 million, depending if you have to do an expansion or you don't have it.

Okay. Yes, that makes sense. And then just a second one, if I may, more on the OpEx front. Just looking at Inmaculada and San Jose, the cost guidance for 2025 looks quite elevated versus recent years. Just wondering whether you can give us a steer on how we should think about those operating costs more over the kind of medium term.

In the case -- thank you, Richard. In the case of -- I will start with Argentina, with San Jose. The cost in San Jose is highly dependent on local inflation and the capacity of the government to evaluate the Argentinian peso. What we are assuming for this period of 2025 is that there is no material devaluation aligned with what analysts are expecting. That doesn't mean that the peso has to devaluate sometime in the near future. We expect it will start doing so in the second half of the year. But for the first half of the year, we are not assuming any devaluation. On the contrary, there is a small inflation of around 1%, 2% per month until June, July. So that's the main driver for the cost in Argentina. We do expect, as the market expects, that there will be a devaluation starting in the second half of next year. And then in the case of Inmaculada, our -- I mean we're also seeing some inflation in the mine -- not in the mine, in Peru, and it has to do with the high-priced environment. So our budget for next year and our guidance for next year includes this inflation represented. For example, in agreement with communities and social programs that we have to implement with our neighboring communities. Likewise, we're seeing that inflation being reflected in other parts of the cost, around between 3% and 5%, and that is reflected in our cost guidance.

Okay. Very helpful. And I mean is it realistic to think is that kind of the new status quo for those 2 operations? Or do you think those unit costs are going to start to moderate from '26, '27?

No. We are working with different initiatives to obtain efficiencies and reduce -- keep reducing costs in Inmaculada and neutralize those effects. So yes, we have plans for that. We're working on that. But inflation-wise, I would say it will be also dependent on how the metal prices, if they stay up, we will see some inflationary pressure. But if they come a little bit down, I mean that will be less relevant.

We'll now move to our next question from Tim Huff from Canaccord.

Yes. Just a couple of questions for me on costs. I mean, obviously, the stock is down, getting hammered down 17% today, and a lot of that has to do with the cost guidance that you've given today. A couple of things. I guess the first one, short term, and the other one, 2025. From a 2024 perspective, I mean, obviously, you guys have gone from late October saying you could hit guidance to now you're 5% to 10% above, and that's not 5% to 10% above for the fourth quarter, it's for the year. So something dramatic has dramatically changed. Did you guys have huge cost blowouts in the fourth quarter across all operations? Was it one operation? Or was there something else in there that's not disclosed in today's release?

Let me say a couple of things. First, we were expecting to have a huge devaluation in Argentina in November, December, and that was what we -- I mean what we heard from the financial analysts that we have been talking about. At the end, it didn't happen, and of course, it has a very big impact on Argentinian costs. And on the other hand, we were trying to do a lot of efforts to pass through high-grade materials to Mara Rosa and try to increase production until the end. But based on the performance of the -- our contractor, we couldn't open the mine enough to get that high-grade material to accomplish -- I mean to increase production. So that 2 effects on the fourth quarter has been the reason why we haven't accomplished -- I mean in October we believed that it was possible. But what happened on the fourth quarter, based on inflation and based on what happened in Mara Rosa, they are the reason that we were not able to reduce the cost. But on the other hand, Inmaculada performed really well. I mean they produced more than its guidance. And of course, its costs were below, also, guidance. So we were very happy with the Inmaculada performance.

Okay. Okay. That's great and helpful. The other questions I had, I guess, more longer term, coming to Will's point, Mara Rosa was brought online, lower cost operation and so forth, and that was aiming to lower the overall cost of the Hochschild asset profile. I mean, obviously, the guidance for next year, for 2025, is not lower. Longer term, I guess, beyond 2025, I mean coming back to the same question, is it your intention to lower the overall cost profile at Hochschild? Or at this point in time, does it look like San Jose and Mara Rosa will stay a little bit higher cost, more sustainably than maybe we previously thought?

This is Eduardo Noriega again. No, the plan is certainly to reduce our costs, and we're working hard with the efficiency programs to achieve that. And we also expect the macroeconomic conditions in Argentina would improve and at least return to the conditions that we had previous to this -- the shock program that president is executing. And of course, we are -- our exploration program is providing with exceptional results that we look forward to have a final estimate and show them with our year-end results. The combination of 3 -- those 3 factors should help us -- should allow us to reduce our all-in sustaining cost in all our mines.

If you let me, Eduardo. I mean there is a factor that hasn't been considered on our guidance, which is the extreme rate in Brazil. And we have been extremely conservative at the time to do these numbers. We have used 5.25, and today, exchange rate is more than 6. So that could mean, I mean, 10% savings on Mara Rosa cost. So that could -- I mean if the exchange rate stayed at 6, yes, instead of 5, I mean the cost will go down. And of course, I mean, it will be a way to compensate the inflation that we are suffering with very high metal prices.

Okay. That's fair enough. I guess last question. Outside FX rates assumptions versus real and so forth, could we expect at some point in 2025 to see a cost savings program announced by you guys in order to more effectively give investors visibility on that cost trajectory as we go into 2026?

We need to evaluate that. But for now, I would maintain the practice that we have been doing. We are working on specific programs for -- to mitigate inflation in the sector. And depending on the results and the progress of those programs, we will be announcing a more detailed guidance if we have the elements to do so. But rest assured that we are fully focused on that initiative. There are plans that are being developed.

[Operator Instructions] Our next question is from Richard Hatch from Berenberg.

Just a couple of questions. Just the first one is on net debt. I was just interested to kind of understand a bit about what drove the net debt number into year-end. I think consensus was at $189 million, you came in at $216 million. Sorry, if I've missed the first part, if anyone's asked this question. But is there anything there, whether it's phasing of CapEx, whether it's working capital, that's just kind of pushing that net debt number up? That's the first one, please.

Thank you, Richard. So net debt has been reduced since September, and it has been reduced despite the fact that we have completed the investment in Monte do Carmo. You know that we have -- we paid $30 million in the last quarter of the year in Q4 to secure the acquisition of Monte do Carmo. We have also done fantastic progress in the Royropata permitting front and negotiation with the communities. So we have been able to secure easement and we have executed payments to secure those easement, which, to be honest, is a key milestone for the Royropata permitting process. And so between those expenses, the Monte do Carmo, together with the advancing on the permitting front and negotiation with communities, we have invested in the quarter around $50 million, which is reducing, of course, our cash and increasing our net debt versus the scenario, we will not have those projects. So those are, I would say, the drivers for net debt for us to be able to reduce it even further. But on the other side, it has added a lot of value to the company to be able to secure Monte do Carmo and to advance in the way we have done in Royropata.

Okay. And then just a question on inflation. I think the costs seem to be a theme on this call, but -- and have you got a kind of a rule of thumb of what kind of inflation you're seeing in the region maybe on a percentage basis? I've got one more after this.

In the case of Peru and Brazil, the inflation that we're seeing is between 3% and 5%. That's local inflation. In the case of Argentina, it's different. And as I said before, we are assuming that there will be, in the first half of the year, probably a net inflation of more than around 15%. And then in the second half of the year, there will be a devaluation that will offset that inflation. But in ballpark, that's what we are -- we're seeing today.

Okay. Understood. And then lastly, just on Mara Rosa, just -- can you just give us a -- just a quick update? Is the mill now running to plan? Are you now ramped up? Is there any more kind of teething problems that we need to sort of be expecting? And I think with that, I think you've alluded to it, but just to confirm, should we now start to see that Mara Rosa costs come down into 2026 as you fully stabilize operations?

So I'd have to say that -- I mean we have guided the market that Mara Rosa will produce between 94,000 and 104,000 ounces for year 2025. That means that Mara Rosa will run at 7 -- between 7,000 and 8,000 tonnes per day with recoveries -- design recoveries. And everything is working. I mean the [indiscernible] we got them to work up to 50% of their rate. We solved the problem with this pool that we need the pumps that we made back in October and now it's running, I mean, totally normal at design rates. So I don't invite any problems, technical problems with Mara Rosa for now. Yes, you need to take into account that Mara Rosa will not perform really well during the first quarter since we have a very heavy rainy season. Yes. But that production will be recovered during the year. And I mean the way that we have started our production in that way, considering the rainy season.

Okay. And what's the -- what kind of ounce impact is that, Eduardo? Is that like a 5,000 ounce impact or more?

No, I mean, in total, it will not be any impact at all. I mean we will be inside the guidance between 94,000 and 104,000 ounces of gold produced in 2025.

Okay. But Q1 softness, how soft should we expect as a rule of thumb?

We don't -- I mean -- well, let's say we produced between 6,000 and 7,000 ounces of gold per month. So you could expect between around 20,000 ounces for the first quarter.

Okay. Okay. And then...

It would really -- pardon.

Okay. Cool. That's clear. And then just to confirm, the 20 -- the outlook for the '26 costs should come off a little bit at Mara Rosa, correct?

Yes. We have guidance -- I mean between 1,287 to 1,370, we'll try to reduce that. And as I said, that figure consider an exchange rate of 5.25, and today, we have 6. I would say that the cost in reais is like 80%.

And sorry, Rich, it's Charlie here. But can I just add that it's worth remembering, and I think we've mentioned it already, that in December, the plant at Mara Rosa produced 9,700 ounces. So that was the record for the year. So it's going very well there at the moment. So I don't think there are any envisaged problems going forward.

We will now move to our next question from Alex Oppong from Bank of America.

So firstly, on your brownfield drilling work done in 2024. Just wondering, are you able to give us at this stage what's the indicative range for the additional mineral resources you're mentioning? I guess a rough estimate will do here. And second one, looking ahead, just curious, what level of gold and silver prices you're using in your projection for the next 12 months? Just wondering if you're able to share any insights on this.

Thank you, Alex. This is Eduardo Noriega again. We're not able to provide a figure for the additional resources because we're still producing the reports and auditing the numbers. But you can see from the drilling results that we have shown in the -- in our production report during the year that we have -- we're being very active and we're seeing very good results. We are -- we do expect to have very strong resource additions in all our mines. Probably the best ever in line with our strategy. I mean we decided to put all our growth strategies in brownfield. So that's why we decided to spend $30 million. You can refer to the impact that we have published on the release. I mean there is very good impact. We will have good results. And it's not only the ounces that we're expecting to add, but the quality of the ounces in Inmaculada, both in Pallancata as well as in San Jose and Mara Rosa. And the prices that we're using in our budget are very conservative. It's $2,100 per ounce of gold and $26 per ounce of silver. I mean those are the numbers that we use for our budgeting cycle. But of course, we're looking at the market today, and we expect that those assumptions will be [indiscernible].

We will now move to our next question from Alfredo Schmutzer from Equinox Partners.

Just wanted to ask again on Mara Rosa. So, basically, you mentioned inflation has been around 5% in Brazil. And then from the FX perspective, the devaluation has been like 15%. So I guess I would have expected, I guess, a positive impact in terms of costs, but we're seeing like higher costs. So I just wanted to, I guess, understand why the cost is higher than what I was expecting from your previous guidance.

Thank you, Alfredo. So certainty, especially in the second half of 2024, the devaluation, they provided a positive impact in our costs. But the factor that Eduardo Landin explained before, associated to our capacity to extract -- to open the pit and extract higher grade areas as we had in the original plan was a little bit delayed. And also, compared to the original guidance on Mara Rosa, you take into account that our ramp-up estimations were more aggressive and that we had a slower one. So those 2 technical factors were not offset by the devaluation that we saw in H2. The inflation that I mentioned, too, was more looking ahead in 2025.

Okay. Yes. Sorry. I was also referring to 2025. So I guess the guidance is between, let's say, 1,300, but that's still above the -- I had in my mind like 1,100, something like that. So yes, I guess, is that coming down at some point? Or this is more like kind of the new number that we should have in mind going forward?

No, I guess compared to our original estimates, we're also being more, say, conservative -- but more -- we're more on the conservative side of our production capacity in Mara Rosa, and that also have an impact on all-in sustaining costs. But on the flip side, the exploration teams are also executing a plan in Mara Rosa. And hopefully, with additional resources, we are going to be able to -- and with the cash or the cost optimization plans that we have in place, we should be able to improve that number.

Okay. And then maybe very quickly, any update on the estimated CapEx for Monte do Carmo? And maybe if you can also talk briefly on the timeline for that project?

No, we don't have any estimation of CapEx rather than the one that we presented before because we are doing, at the moment detail engineering. That detail engineering will be finished, I would say, in Q3 2025. And that will be the point that we'll be able to present the value engineering results, to try to reduce CapEx for this project. I mean in terms of timelines, as I said, we will try to finish detail engineering on Q3. We will also -- we'll be buying main equipment, lead time equipment like mills, things like that, this year. And we will be ready to start building the project probably on Q4 2025 or Q1 2026. At the moment, our estimation is like $250 million.

And it appears there are currently no further questions at this time. With this, I'd like to hand the call back over to Eduardo Landin for closing remarks. Over to you, sir.

Thank you very much. Now I would like to thank you for being here at this call. And of course, I would to say that we will try to continue reducing costs through looking for efficiencies. I have to say that our estimations are conservative in terms of exchange rates, and I think that will help the results on 2025. And I think we will continue doing a lot of efforts in order to develop Monte do Carmo as soon as possible and also Royropata. And we have plans to restart dividends on 2025. It's something that we will be proposing to the Board of Directors, and we believe that it will be well received. And I have to say that we will continue putting a lot of efforts on exploration, try to bring as many resources, inferred resources , quality resources to the table to try to extend our life of mine. And I have to say also that our balance sheet is quite strong, and we are ready to get into the investment cycle again with Monte do Carmo. Thank you very much, and that's all for me.

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