Hochschild Mining plc (HOC) Earnings Call Transcript & Summary

Hello and welcome to Hochschild Mining Q2 Results Conference Call. [Operator Instructions] I would now like to hand the call over to Eduardo Landin, Hochschild's CEO. Please go ahead.

Hello, and welcome to our conference call to discuss our second quarter production results. I'm here in Lima with Eduardo Noriega, our CFO; and in London with Charlie Gordon, our Head of Investor Relations. Group production in the quarter was almost 82,000 gold equivalent ounces. Production was higher than the first quarter as San Jose in Argentina normalized after its shorter period earnings in the year. And we also have a solid performance at Inmaculada in Peru. Clearly, our main focus during the period has been our Mara Rosa operation in Brazil. As we outlined in mid-June processing operations at the plant are currently half with the plant future manufacturers and lead currently on site improving the filtering process. We are also carrying out general maintenance as well as considering if we require any additional equipment such as a tailings thickener to improve feeding through the filtering plant. Mining has continued and before the plant has stopped, we were able to produce 12,400 ounces of gold in the quarter, which bringing the first half total of around 28,500 ounces. We are aiming to be able to give you a full update at H1 results, and we expect this will include our revised forecast for Mara Rosa and for the company as a whole. Inmaculada has continued a solid year with just over 54,000 gold equivalent ounces produced in the quarter which bringing the first half to 106,000 ounces and well on track to meet our forecast of between around 200,000 ounces the year as a whole. In Argentina, production increased from the first quarter, which was, as you know, impacted by seasonal vacation in February. Production was 40,000 gold equivalent ounces, which makes almost 53,000 ounces for the first half, and we expect a slightly stronger production in the second half according to our mine plan. Our exploration side, our brownfield program has delivered its first drilling results of the year for Inmaculada, San Jose, Mara Rosa and Monte do Carmo, and we have a comprehensive program for the second half, which will be reported back in the third quarter. Despite the situation at Mara Rosa, our balance sheet remains strong, we have been generating good cash flows with a cash balance of $110 million of cash end of June, and net debt has been reduced $103 million. And the net debt EBITDA ratio is around 0.4x. This figure also includes the payment in June of full year dividend of $10 million and our recent buyback of $30 million of a streaming agreement that we have at Monte do Carmo which we have incurred from Cerrado Gold. With that, I would like to open for questions.

[Operator Instructions] We will now take our first question from Marina Calero of RBC Capital Markets.

Just a couple of questions from my side. The first one, I mean, based on the words that you have done so far, can you explain us why do you think the filter prices are not working as expected? And the second question, my understanding is that you have permits to deposit tailings as dry stack. Given the ongoing issues you've been having with the filter plant, can you confirm that the materials you're currently depositing meet is the required specifications for dry stack tailings?

Marina, I mean, basically, the reason why the filtering plant was not working is because we haven't -- when we acquired Amarillo, we received a feasibility study and basic engineering from them. So we developed a detailed engineering based on those studies. And those studies did not include a filter for the tails. I mean those studies said that with the actual pre-leaching thickener, it was enough to reach the percentage of solids that you would need in order to use the filters. I mean, we've been using the filters for many months now. We have seen that -- I mean we have realized that those documents that we received from Amarillo was not correct. I mean the reality is that we are going to need a thickener. So I mean, we are talking with different manufacturers of thickeners, and we are including those in the documents that we are presenting to the authorities. And we expect to have the thickener in place between six to nine months and reach that 50% of solids that we will need in order to make sure that the filtering plant is working. Remember that the nameplate capacity of the filters coming out forward is like 2,500 tonnes per filter. So we believe that including that thickener, I mean, we will reach that capacity. The second question, Marina, is that, I mean, we have been working with -- as you know and you were at the visit with different system, alternative systems to the filters and they have been working but not reaching exactly -- I mean, like, let's say, 25% of stability instead of 18%. I mean the stability of the tails are not compromised. And what we're doing at the moment is just reposition those tailings taking into account that we are in a dry season and putting back those tails and compacted them to make sure that we come back to dry stack, a dry stack situation that is the one that is approved in our permit. So -- but all these have been fully coordinated with the authority. And I mean we are in the best possible situation.

We will now take our next question from Richard Hatch of Berenberg.

I guess the question is going on Mara Rosa, which is, firstly, are you sort of -- how confident are you that these fixes are the fixes you need to put in place to actually get this mine back up and running. That's the first one.

Okay. I mean we have been working with different consultants. I mean we have been working with ANDRITZ, we have been working with Metso, we have been working also with a manufacturing leader, a thickener manufacturer from the U.S., with different consultants and they -- I mean, they believe that including that thickener -- I mean, the filter is not going to work. At the end of the day, I mean, we are today commissioning the filters we have been able to -- I mean, to test the filters we installed the thickener considering a percentage of solid like around 40%. I mean, we will see the performance in the next, let's say, 2, 3 weeks. So I mean, I will be able to give you more color upon H1 results on the performance of the filters. But I believe that we are using, I mean, the best possible technicians, technical experts to make sure that we will reach a good -- I mean a good solution for Mara Rosa. Remember that I mean, the plant has been producing up to 8,000 tonnes and the only problem that we have at the moment at Mara Rosa is filtering. And I have to say that, I mean, filtering is -- I mean, very expensive in general in the world is a difficult one. But I believe that with those measures that we have taken also the cooperation of very good professional people like Enrique as a country manager today, we have Thiago as building manager, we are also hiring a new filtering manager that we hire from a place that is working with filters. We are doing everything in our possibility to make sure that the plant reach its nameplate capacity.

And then will your H1 results presentation be at a point where you can give the market more color on the long-term cost impact of this on the mine and the CapEx costs to address it?

Yes. I believe so. I mean, we are working on that to show how the -- I mean, in a month's time, we have the process of implementing the thickener. And also, we will be able -- I mean we are working at the moment on cost. And I believe that in H1 results, we will be able to give color and -- I mean we'll give you a projection of at least some cost and production for sure for the company.

Okay. Do you expect at this point to the revisions you're making to make much of a step change on the cost profile of the mine?

Well, I would say that, I mean, the cost profile of the mine for year -- I mean 2025 is going to be -- I mean, it's going to be very high because, I mean, we have been stopped. We are doing some maintenance and so on. But I would say that, that cost that we will be able to present, it will not reflect -- what will be the ongoing cost for Mara Rosa in the future because, I mean, we are doing everything in our hands to make sure that we will go back to the original situation where we could reach a cost, let's say, close to $1,300, $1,400, that, that should be the cost that an open pit operation should have. So I mean, my expectation is to solve all the problems that we have at the moment that we are doing that. And for sure, for next year to have a review and all the measures to make sure that we go back to a normal cost.

Okay. Should we -- I mean we've got a 5-week plant shutdown booked in for Q3. Is that sensible? Or should we be even more conservative than that?

Well, I cannot tell you that. I mean I know -- I mean we have been stopped for 4 weeks now. And we are -- I mean, today, we are starting production at a variable rate to make sure that we can test the filters with tails. I don't know if I'm going to need more stock because, for example, we are planning to introduce a new pit well, which is part of our thickener in our pre-leaching thickener. And I know that we are going to take between 10 and 15 days to do so. So for sure, on the second half, we will have some stoppages, but we will try to make sure that we will be the less -- and second half will be like a ramp-up to make sure that we reach the -- I mean, the best possible situation taking into account that we are not going to have the thickener until H1 2026.

Yes. Okay. And then -- sorry -- last couples, one is just how is this informing your thoughts around Monte do Carmo? And just in terms of the rigor that you're considering into the technical aspects of building a new project?

Well, I mean, Monte do Carmo we continue doing engineering studies. As you know, we were doing -- I mean we are doing detailed engineering, the plant detailed engineering at the moment. We are doing certain geochemical studies, hydraulic or I mean, hydro -- hydrogeology study also at Monte do Carmo. We expect to finish those, I would say, between Q4 and Q1 2026. And at the end of the day, I believe that we will be ready to present new numbers, a financial analysis of Monte do Carmo project, I mean close to the end of the year. And then the decision to go ahead with the construction, it could be during Q1 2026. At the end of the day, we cannot start construction during the rainy season, which is Q1 2026. And I mean any construction activity will start on Q2 2026. I mean the Monte do Carmo looks like a very attractive project, especially with the current prices, I mean we have checked the geological model. I mean the resources are there. So we continue doing some exploration to make sure that we try to bring as many new resources to improve those numbers, the real numbers.

Okay. And the last one is, I assume you have -- you've got no legal recourse against the previous operators or owners of the project just based on the fact that, as you say, that the technical work that was undertaken is wrong. So I assume there's no legal resource or damages that you can claim against this?

I mean what I can say at this point is Rodrigo -- I mean and [indiscernible] left the company and delivers work in a new company, I mean he resigned from his role as the COO. And I mean we are carrying a full investigation of the situation, but I don't have any conclusions that I can give you at this point.

We will now take our next question from [ Tom Mccleery ] of Consilium Investment Management.

Okay. I just had a quick question. Do you expect any impact to your dividend policy or dividends due to the slowdown of the Mara Rosa mine?

Eduardo Noriega will answer that question.

No, actually the policy -- the dividend policy that we have allow us to accommodate different circumstances of the business so that the payout ratio is the appropriate one. So no, no impact to our dividend policy.

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

I just had three follow-ups, all on Mara Rosa operationally focused. The first one, just on something that perhaps brought up and that you touched on. I was thinking about the ramp-up. I mean obviously, you've stated that you're going to do a stage recommissioning in the second half, which tends to imply that you hope to be at or near run rate by the end of the year, but that puts you snuck in the middle of another rainy season. On top of it, you've got probably more like an 8-week periodic shutdown, including the retesting of the filtering equipment. And you also don't have the thickener on board until the first quarter of '26. So just -- I mean the way I'm thinking about it is that the best way to look about this is that the earliest you'll hit run rate or produce a full quarter of production is the second quarter of '26. Is that sort of the same way you're thinking about it from a more conservative perspective?

It's difficult to say today because I mean, as I said, I am commissioning the filters at this moment in time today and it will depend on the capacity of the filters without the thickener. I mean, as you probably know, we will be able to run a certain increase of solid on the tails without the thickener. And that's the conversations that we are having with ANDRITZ at the moment. I mean if we -- I mean, at a certain point, we have been able to reach close to 50% solid without a thickener. On the past operation, we have been able to reach that level. And when we acquired the filters, the specifications of the filters state that with 50% solids, they will reach 2,500 tonnes. That theory what we have in place. But I mean, to make sure that, that percentage of solid is going to be present along with the life of mine, that's the reason we are thinking to implement that thickener. I mean let's say -- I mean, let's see what is the performance of the filters in the next month. For sure, we will be able to give you some color on H1 results. And of course, we will try to produce as much as possible with the equipment that we'll have. I have to say that it's very important to say that today, we are completing a very qualified team, full of technical people that has been working -- I mean you know that [indiscernible] is coming from Japan. Japan is a few kilometers from Mara Rosa and so it is bringing a lot of expertise to know how to work even during rainy season. So let's see the combination with all the technical knowledge that we are bringing plus the consultants plus the suppliers, let's see what is going to be the future for Mara Rosa.

Second one, sort of related to the seasonality, which is -- I mean, you've been operating Mara Rosa for 5 to 6 quarters at this part in time. The three quarters that you operated in 2024, you were ranging grades in between 1.32 to 1.42 grams for the quarter, probably a little bit higher, at some point in time a little bit lower. But obviously, that's above even the life of mine reserve grade even in the proven category. So I'm just wondering going forward -- and then obviously, the subsequent two quarters, which is the two quarters in '25, you dropped down to an average of below 1 gram a tonne, which probably isn't the best sort of seasonality or volatility that you want. But I'm just wondering, given the experience that you've with the problems with the thickeners, I know you've got the tails with the thickener coming in. But with the filter problems that you run into, are you guys going to -- are you even thinking about running a more seasonal life of mine plant, i.e., higher grade, lower throughput in the winter or rainy months and maybe lower grade, higher throughput in the summer months. And that way, you address the rainy season the filter problems without having to fully depend on a tailings thickener all the time?

Yes, that could be a possibility, and it's part of the ongoing plans that we are developing. But at this point, I mean, I cannot assure that, that will be the way. Let me finish the work with the filters and see. The other piece of information I can give you is that we are building a sort of filling around the filtering plants, it's a light filling to make sure that we can deposit tailings during the rainy season and not affect the humidity of the tails. So that's also one measure that we are taking. And of course, I mean, we can always lower down production during the rainy season and try to increase the output during the dry season. That's a possibility. But let me finish the work, and I will come back to you on H1 results.

Okay. That's fair enough. And then the last one is sort of a longer-term question on Mara Rosa, which is at the end of '24, you reported about 5 million tonnes at 1.22 grams in terms of reserve grade, the higher grade fit of it. And I don't know on my sort of numbers, if you're going to be running that through earlier years, i.e., '26, '27, you're going to get pretty much through that higher grade portion of it by '27, then you'll be back down to the 1.13 grams, if there's no change to the resource or the reserves. And at that sort of run rate you're back down closer to, at least on my numbers, closer to about 80,000 ounces per annum, which I think is sort of in line with what you guys stated originally. But are you guys thinking about trying to run this at a higher rate in the next two years? The same old plan? Or are you thinking maybe take it a little bit more conservatively and run it steady state from here on out and keep the higher grade as a nice option to have should you run into a really wet rainy season again?

No, it's a complex one, that question, but let me try. I mean, the original plan was to try to treat the best possible grade during the first three or four years of the operation. And basically, that -- I mean, try to what we call a differentiated mining method. I mean where you mine only high-grade, you send that grade to the plant and the low grade you send it to, I mean a deposit, to wait for future years, yes. I mean we believe that, that will be the best possible way, even though that means that for the first three or four years, we are going to have a higher production and then from year 5 production will be lower. That's the plan because we believe that that's the way to increase the NPV. And our bet is that through brownfield exploration, you will bring new resources to complement that production for year 5 or year 4 onwards, okay?

That's fair enough. So you're sticking to the old plan as well. You're going to run the high grade and...

Yes. I mean the old plan looks like that, and we believe that it's the way to be.

We will now move on to our next question from Felicity Robson of Bank of America.

Inmaculada grades and recoveries were slightly better. Can we think about a similar progression for the rest of the year here?

Yes, that would be the case.

And we will take our next question from Ian Rossouw from Barclays.

Just a few follow-ups on Mara Rosa. On the tailings thickener, I mean, you said you'll give us a bit more details on timing and CapEx at the results end of August. But can you give us some sense? Are we talking tens of millions of dollars? And then just when you do install that thickener in H1 next year. Do you need to shut the plant down for some period as well? Or can you install that while running and then switch across?

Well, to give you some sense of -- I mean, a similar to cost between $2 million and $6 million, install. That's a ballpark for the thickener, but we don't have yet a final quotations and engineering I mean to know exactly the number. And in terms of the stoppage, I mean, we'll try to review the stoppage as small as possible. I mean, of course, to connect the thickener to the rest of the plant, it will take a few days. But I mean, our plan is to make sure that those days will be the less possible one.

Okay. Okay. Great. And then maybe just following up on Felicity's question on the grade profile. I think on the Q1 call, you sort of gave some expectations that grades at Inmaculada should fall across the year. Can I just confirm you said no, they probably stay at similar levels. So -- because at the moment, they run like quite a bit above.

Yes, I believe that it will stay as Q2 for the rest of the year.

Okay. So we're sort of tracking quite a bit above half of the full year guidance. So that bodes well for full production for the year above the 200,000 ounces you mentioned?

We would like to stay at the range that we published at the beginning of the year, between 198,000 to 200,009 ounces, within that range. We don't want to produce more than that from Inmaculada to make sure that we do not affect future years of production.

Okay. And then maybe just the same for San Jose. I think you were saying at the time, the grades should improve. It seems like -- I guess that has happened, but it's probably not to the same extent what you indicated. Should we expect a bit more of an improvement in grade in the second half? I guess you said production should be higher? Should we take it as higher grade and higher throughput?

Yes, typically, our second half of the year in San Jose is stronger than the first one, and we expect to see a recovery on grades in San Jose so -- to achieve the guidance that we gave to the margin. It's just a timing effect based on our mine plan, nothing relevant in terms of a pickup in overall grade.

Okay. So that's the bottom end of that range, 1.12 to 1.27 or relatively to that?

Yes.

And we'll now take our next question from Alfredo Schmutzer of Equinox Partners.

I expect you to have an update on the mining part at Mara Rosa and how has your contractor been doing with your mining and if you have been able to access this higher-grade zone?

I cannot hear you well. Can you get closer to the microphone?

So my question was on Mara Rosa and more specifically the mining part. So just to have an update on your contractor, how he has been performing lately. And if he has been able to reach these higher-grade zone, I think that's basically my question.

Well, I mean, the contractor is performing very well. We have been able to reach between 70,000 tonnes per day to 80,000 tonnes per day which is an improvement from two months ago. And also the stoppage and the run rate of the plant from now until the end of the year is going to help to make sure that we open the mine. I mean -- and take the -- I mean, and reach the material that will be needed for the future. So I don't see a problem with contractors now. I mean they need to improve some in mechanical availability of the equipment at this point in time, but we are working with them.

Perfect. And then maybe just a follow-up. So this plan that you just were talking about of mining for the first three, four years higher grade. Are you basically reconciliation of the grade is according to plan? And basically, are you expecting to produce at the grades that your original plan was expecting?

Well, I mean we haven't finished the reconciliation exercise for our full year, yes, but what we have done is to do some infill drilling on the areas that we will be producing on 2025 and 2026 the grade based on the original plan and confirm.

There are no further questions in queue. I will now hand it back to Eduardo Landin for closing remarks.

Well, thank you very much for being here. I believe that we have a good service -- I mean, based on the situation of Mara Rosa, we have very good results on Q2 for Inmaculada and San Jose. And I have to say that we will continue working on Mara Rosa to make sure that we solve all the problems and make sure that operations reach its capacity as we plan at the beginning of the investment. Thank you very much.

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.