U.S. Markets closed

Edited Transcript of HOC.L earnings conference call or presentation 14-Aug-19 1:30pm GMT

Half Year 2019 Hochschild Mining PLC Earnings Call

London Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Hochschild Mining PLC earnings conference call or presentation Wednesday, August 14, 2019 at 1:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Ignacio Bustamante

Hochschild Mining plc - CEO & Director

* Ramón Barúa

Hochschild Mining plc - CFO

================================================================================

Conference Call Participants

================================================================================

* Daniel Edward Major

UBS Investment Bank, Research Division - Director and Analyst

* Izak Jan Rossouw

Barclays Bank PLC, Research Division - Director

* James Andrew Keith Bell

RBC Capital Markets, LLC, Research Division - Analyst

* Michael Stoner

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Patrick Jones

JP Morgan Chase & Co, Research Division - Analyst

* Timothy Alan Huff

Peel Hunt LLP, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to Hochschild Mining 2019 Interim Results Webcast and Conference Call.

I would now like to turn the conference over to Ignacio Bustamante, the CEO. Thank you.

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [2]

--------------------------------------------------------------------------------

Thank you very much. Good afternoon, everyone. This is Ignacio Bustamante, CEO. With me is Ramón Barúa, our CFO. And in London, we have Charlie Gordon, our Head of Investor Relations. So thank you very much for joining us in our interim results presentation.

Let me start with the key highlights from the announcement from this morning. The financials are well in line with expectations despite our lower silver prices shown in the first half of 2019. Production and costs are on track to meet full year guidance. 2019 exploration program already delivering encouraging results, I will talk a little bit about that later in the presentation. We are recommending an interim dividend of $0.02 per share, which is equivalent to $10.2 million, which is slightly better than the announcement that we made same time last year. Revenue is at $354 million, all-in sustaining cash costs at $921 per ounce of gold or its equivalent in silver at $11.4 per ounce. The EBITDA is at $154 million. EPS is at $0.04 per share. And the cash is right now at $95 million compared to $80 million at the end of 2018. And the net debt is at $62 million, very healthy net debt compared to $77 million at the end of 2018.

With these highlights, I would like to hand over the presentation to Ramón Barúa to discuss the interim results.

--------------------------------------------------------------------------------

Ramón Barúa, Hochschild Mining plc - CFO [3]

--------------------------------------------------------------------------------

Thank you, Ignacio. Hello, everyone. In Slide #5, we have the pre-exceptional P&L. I think it's a very solid set of results. Revenue was slightly below what we had in the same period of last year. Despite having very similar gold prices for the period, the silver price was around 8% lower. So that's a big part of the story. The other big element, of course, is the fact that we no longer have the contribution of Arcata currently in care and maintenance.

The costs. Another theme that you will see repeated throughout the presentation is that the costs for the period were very solid basically due to operational efficiencies and very solid grades. And also, the fact that we didn't have the high-cost Arcata contributing to the cost mix resulted in a very solid gross profit for the company despite the lower sales at $101.6 million compared to $105.1 million for the comparable period of last year.

And then the administrative expenses were slightly higher mainly due to some inflation and some innovation initiatives that we are running at the company. Selling expenses were, in fact, much bigger, and the sole explanation to that is the reintroduction of export taxes in Argentina. Exploration expenses were also higher, in line with our aggressive campaign at all of our mines, especially in the case of Inmaculada, you are very well aware. And Ignacio, we'll talk a lot about the results that we are already having in that front.

In the others, pre-exceptional, the number is similar to what we had last year, although there's an exceptional item there of close to $12 million, which represents the costs associated with the layoffs that we had in Arcata unfortunately earlier on the year.

The operating income came at -- in at $44.7 million compared to $64.6 million of the same period in 2018. Finance expenses were much lower than last year due to a reduction in debt and a reduction in cost. And we expect that you'll see the number coming even further down in the second half of the year as we have refinanced the $150 million that we had outstanding.

The FX line is finally a little bit more calm in the period after not having a lot of depreciation in Argentina. Although, we are already seeing, in the second half of the year, strong movements due to the political turmoil in that country. The tax line is also looking much more solid and much -- and the effective tax rate looks closer to the statutory rates that we have in the countries where we operate given that we didn't have a strong impact coming again from devaluation in Argentina, primarily.

So the net profit for the group stood at $25.1 million, better than the $22.2 million that we had in the previous year. On an attributable basis, we had earnings per share of $0.04 compared to $0.05 of last year. And very importantly, the EBITDA came at $153.7 million, which very favorably compares to the $144 million of consensus -- of market consensus.

In the following slides, we have a very helpful picture of how the cash evolved during the period. So we started the year with $80 million, and our 3 assets, Inmaculada, Pallancata and San Jose, had very strong cash contribution. I would like to highlight that, that contribution came at prices of slightly above $1,300 gold and $15 silver. So we should expect a significant increase in the second half if current spot prices were to prevail.

The number that you see there in brownfield represents not only the amount that went to the P&L but also the amount that we capitalized. We'll have a little bit more detail on that later on the slides. And the admin expenses do include the LTIP compensation that is associated to the performance of our share price. We are announcing $10 million of dividend. And you can see there the nonrecurring costs associated with the layoffs and other expenditures in Arcata.

There was a question about the working capital, but I can assure you that these are only temporary differences. And our expectation is that those will even out throughout the year.

In the following slide, we have the detail of the all-in sustaining costs, both for the group, our operations all-in sustaining costs, and also for the individual operations. Overall, as you can see, with $11.4 per silver equivalent ounce, we're right now below our guidance for the year of $11.8 to $12.3. And our expectation is that, during the second half, there will be slightly higher costs. Thus, finishing the year, we expect to finish the year within the guidance that we gave you at the beginning of this year.

Important to highlight that Inmaculada showed a very strong performance. Again, the basic explanations have to do with operational efficiencies throughout but especially also very solid grades. You remember that our policy is to mine the average grade of the deposit, so that should even out in the second half of the year. Pallancata, the same thing. There is some additional CapEx that we plan to develop in the mine in Pallancata, so our expectation continues to be reaching the guidance for the year. And in the case of San Jose, we have had the benefit of the revaluation offset by the additional export taxes, again, reinstated by the Macri government for this year. So overall, very good performance in Inmaculada, Pallancata, not as good in San Jose, but the overall numbers look very, very promising.

In the following slide, we have a summary of the operation's sustaining and development CapEx. You can see there that we are very close to the midpoint of the guidance of the year. Although again, as I mentioned earlier, in the second half, we expect to have a slightly higher number overall thus approaching to the higher end of the guidance.

On the table on the right, you can see the exploration expenditure showing that the brownfield expenditure for that period was around $13.2 million, which, again, is close to the midpoint of the guidance of $27 million, and the greenfield stands at $4.7 million, also close to the midpoint of $10 million guided for the period.

In the following slide, we have a summary of the balance sheet. The net debt was reduced basically as a result of higher cash balances. As I mentioned, we refinanced with local banks, BBVA and Scotiabank, the $150 million that we have, bringing down the interest rate from 3.1% to 2%, thus expecting additional savings in the second half of the year.

Something to note is that now we have the whole $150 million maturing in June 2020, our expectations, of course, is that, as the year progresses and if we can achieve lower interest rates or similar interest rates, our intention is to refinance that and have a more comfortable amortization profile at the end of the year.

Finally, given these very strong and solid results, the board has approved a dividend of $0.02 per share, which represents a little bit more than $10 million. That's very much in line with what we had last year during the same period.

With that, I'll pass the presentation back to Ignacio.

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [4]

--------------------------------------------------------------------------------

Thank you, Ramón. So if we move to Page 11 of the presentation, you can see how we are very much on track to achieve our guidance for the year in terms of production and all-in sustaining cash costs. First half production of 19.9 million ounces compared to a full year guidance of 37 million ounces, while our all-in sustaining cash costs at $11.4 compared to the guidance of $11.8 to $12.3. So very much on track in our guidances.

If we move to the next slide, we would like also to refresh you with our growth strategy, which is based on 4 pillars. The first one is on brownfield, in which, we continue targeting material life-of-mine increases in all of our operations with the goal of improving the quality of our resources and also, ideally, to see if it's possible to use the spare capacity that we have available within the company.

The second part of the strategy is greenfield, in which, we continue working on streamlining our portfolios, taking the best possible properties and progressing the drill-ready projects that we have. And I'll give you a little bit of an update on that. We also have the focus on early-stage projects in which we continue to focus on optimizing those early-stage projects, continue doing drilling so that we can improve the quantity and quality of our resource base and, as we have discussed in the past, also evaluating new technologies and other minerals.

And finally, on the strategic alliance front, we continue looking at possibilities for acquisition or joint ventures as long as they meet our criteria, which is that whatever we acquire needs to be in early stage, we are looking for control, needs to have significant geological upside as well as a very attractive return on our investment.

Moving to Slide 13. I will not get into detail here, just basically to reemphasize the fact that we are not only on track to achieve production and cost guidance corporate-wise but also on an individual operational base. So all operations are performing as expected. So we are also happy with our performance.

And if we move to Slide 14, you can see some of the progress that we are having in the exploration in Inmaculada. As you may recall, last year, we brought a significant amount of ounces, about 103 million ounces of silver in Inmaculada, which significantly extended the life of mine. However, those ounces initially were showing a grade that was lower than the average grade of our resources and what we are currently producing. So the focus in 2019 has been to make sure that the ounces that we bring -- the new ounces that we bring are focused on improving the average grade of the deposit and taking it as close as possible to our current production levels. And so far, we are being, I would say, fairly successful.

We -- the first part of the focus is to focus on those new structures with good grades close to the Angela vein. And we have been very successful, particularly on the northwest of the Angela vein, namely the biggest discovery that we have had so far, and this is still a potential resource. It's a new vein called Pilar. As you can see there in the table on Page 14, the -- some examples of the drilling intercepts that we have seen so far, you can see one in which you have 2.2 meters with 41 grams of gold and 480 grams of silver; 1.1 meters with 32 grams of gold and 5 kilos of silver; one, probably the most attractive one, which is 11 meters of 18.2 grams of gold and 773 grams of silver; and another one with 1.4 meters and almost 20 grams of gold and 440 grams of silver. So very encouraging results so far. That's not the only structure. In addition to Pilar, we have also [Andahuaylas], which have other structures that are appearing in that area, Susana Beatriz, et cetera. And we are going to continue focusing on turning that potential into an inferred resource during the second half of the year.

In addition to that, we have -- you may recall that we did this Titan geophysical work, which is basically geophysical work focused on getting information further deep than the regular geophysics work. We had a very interesting target, a high-resistivity target that we're currently exploring. And particularly the area that I just referred to, which is in the northwest side of the Angela vein, is an area that was very clearly flagged by this Titan work. So far, the indications that, that Titan geophysical work is giving us highly correlates to the presence of good mineralization deposits. We also have indications that mineralization in Angela itself could go even deeper. So we are also targeting many drill holes towards proving that hypothesis. And if that proves that, that would be fantastic. We will see something similar to what we're currently operating, so that will be very good, and we should have an answer to that within the next few weeks.

And also, very importantly, that you may recall that we have said that in Inmaculada, in Pallancata, in general, when we have the inferred resource and we were to turn it into a measured and indicated resource and a reserve, in general, what we have seen is that there's a very positive reconciliation of grades. So the drilling tends to -- the initial inferred resource really tends to underestimate the overall grade of the deposit. That has proven to be the case also in Millet. We have focused on the west side of Millet, which is the one that is closest to the Angela vein, which will be the first ones to be put into production. And comparing apples-to-apples, so the same area that we have done the infield work this year comparing to the same area in which we have the inferred resource at the end of 2018, we are seeing a material improvement in the grade of around 24%. So that is very positive news. Hopefully, that continues to extrapolate into the rest of Millet and also into the Divina structure and all the other structures that we found during 2018. So that's very positive news. And also, we have a long-hole program set to explore northwest and south of Angela that should begin in the fourth quarter of 2019.

Moving to Pallancata. Also, Pallancata, as you may recall, we have very encouraging drilling targets there. We have already started drilling at Palca. And so far, we have already found mineralization, particularly in 4 structures: Santa Beatriz, Escondida, Prometida and Roxana veins, and already giving us intercepts that show mineralization. Some of them are more encouraging than others. So now that we have the potential resource, the goal is that, during the second half of the year, we're going to be focusing on those that are looking to be the most promising and with the intention of turning those into inferred resources within the next few months while we also continue evaluating many of the other structures. So far, we have only evaluated 6 out of the probably 15 or 16 structures that we can appreciate at first site in Palca. We're still waiting for the final Cochaloma and Pablo south. We already have the environmental permits. We are waiting for the start of drilling, the start of exploration program permits in Cochaloma and Pablo that should come fairly soon. We are expecting that to happen at the end of this month. So we're looking forward to start all the drilling campaign in those 2 areas.

We are scheduling to do Titan geophysical work, the same work that we have done in Inmaculada, the same one that we have done in Arcata, for the future drilling campaigns. We're scheduled to do that at the end of Q3 of 2019. So hopefully, that can give us even additional and more attractive targets in Pallancata, so we're looking forward to that.

And finally and most importantly, we have already started the drilling campaign in Corina, which, as you may recall, we have been waiting for that permit for the past 4 years. So the drilling campaign has already started, and hopefully, we can give the market some updates within the next few months.

Moving to the next slide, we also have San Jose. In San Jose, we are targeting basically 4 different areas. One area is where the current veins and the current mine is operating. The other one is Aguas Vivas, which, as you know, we're looking for a potential polymetallic sulphide deposit, an initial indication of gold, silver, lead and zinc. We continue looking at certain other areas a little bit south of the current deposit.

And finally, we are also exploring the areas that are surrounding Cerro Negro that are also looking to be encouraging and with a certain positive indication. So that should be a focus of the drilling campaign for the second half of 2019 in San Jose.

Moving to slide on Page 17. We are also looking for further exploration optionality. As you know, we have many alternatives very close to Arcata. You know that the Arcata plant is currently under temporary care and maintenance, but we are continuing moving ahead with Condor. As you may recall, Condor is a small private mine with a strong potential. We're targeting to invest $5 million in the next 5 years, and we're currently working on the permitting to be able to get the access rights and start our drilling campaigns hopefully this year, if not early 2020.

In the case of Azuca, we completed a model for West Azuca. And now we're currently finishing the permitting stage to drill selected targets at Huacullo, which is right next to Azuca. Hopefully, that can complement and bring additional resources of better quantity and quality and see if that can help the pull-in value of the Azuca deposit.

In Ares, you may recall we have 1,000 tonnes of spare plant capacity there. And we have started a long-hole drilling program to evaluate all the targets surrounding the Victoria vein, which is what gave most of the production in the -- during the life of the Ares deposit. And we have also started the geological work in the northern area of Ares, and it's advancing very well.

And finally, we have Crespo. As you may recall, Crespo is already a profitable project, even more with current spot prices. It's already fully permitted. But the problem is that it's still not up to the size that we would like to have. So we're currently working on exploring further geological potential. We are waiting for permits in certain areas. And once we have that, we are going to be drilling below Crespo in the Queshca area and also evaluate some colluvial deposits north of Crespo that could add additional resources and take it, hopefully, if we are successful, to another level of size.

Moving to slide on Page 18. We have already started some of the greenfield work. As I mentioned, in the case of Peru, drilling has already commenced in Corina, and we're looking forward for that drilling campaign to finish and see what the results are. And we continue working on the permitting for Casma, Alto Ruri and Cueva Blanca.

In the Americas, we have already started drilling Ferguson, Nevada. And also, we look forward to receiving the first results. That has just started. And we are very close to start drilling, in the next few weeks, in [Mars] in Nevada, Indra/Agni in Chile and in the Snip project in Canada. And finally, in Chile in Dos Marias, we continue doing the geological work for Dos Marias.

And finally, on that front, we have Volcan. Volcan, as you may recall, is a very large gold deposit in Maricunga in Chile. It's starting to look even more attractive now with current gold and silver prices, where mostly gold is -- (inaudible) gold prices. And there are 2 critical issues there. One is to make sure that we find a solution regarding the water, and the other one is that we are working also in evaluating the possibility or the alternatives to improve the metallurgical recoveries to make sure that, even with lower prices, this could turn into a fairly attractive and profitable project.

So we are starting to be -- no, we are starting to do some additional work in Volcan with the current [perspectives] looking more favorable. And we are going to continue updating the market on any developments that we have, mostly, I would say, on the recovery front initially.

Moving to the next slide on Slide 19. We have also continued making good progress on the innovation program. We are presenting there a few of the initiatives that we are managing. On our sorting, we are already seeing very encouraging results. We are seeing in the first tests that we have made a mass reduction of 16%; [grade] improvement of 12%; ore recovery, very high at almost 98%. So so far, looking very good. We are in the process of starting a pilot-scale testing. And once we complete that, we're going to start with engineering, bidding and execution and take it to the next level.

On the mine digitalization front, we are ready to start a pilot test in Inmaculada. That pilot test is ready to start in the first week of September. And if we're successful, which we expect to be, the idea will be to start with a full-scale implementation following that pilot test.

And finally, on Deswik, which we have told or updated the market in the past, is a fantastic tool to eliminate -- to delineate better ore veins and maximize the return from our mining plans. We have already finished Phase 1, which is to make sure that all our corporate plans are constructed using that tool. And now we're in the Phase 2, which is making sure that each unit's production plans are all of them aligned under Deswik. We are very close to finishing that second phase. That should be able to start very soon. But needless to say, we are already starting to see the efficiencies being achieved by this fantastic tool that we have implemented in the company.

And finally, moving to the last slide, the conclusions and a summary of the presentation. Our 2019 production and costs are on track. Inmaculada is expected to continue delivering material life-of-mine increases. We are very excited with the potential that we're seeing in the drilling campaign. We have exciting drilling programs ongoing at all our assets, not only in Inmaculada but also Pallancata and San Jose. And again, we're going to update the market as soon as we make progress on that. We have attractive optionality in greenfield, in our early-stage projects and our -- and on our M&A strategy. Our innovation program is progressing well, aiming to deliver operational and project upside. We have a very strong balance sheet. We have also very strong free cash flow generation, which is also increasing. And finally, to remind that we have announced an interim dividend of $10.2 million. So we want to present also very attractive opportunities for shareholder return to our shareholders.

So that finishes the presentation. I would like to open up to any questions that you may have.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we'll take our first question today from James Bell with RBC Capital Markets.

--------------------------------------------------------------------------------

James Andrew Keith Bell, RBC Capital Markets, LLC, Research Division - Analyst [2]

--------------------------------------------------------------------------------

Just firstly, maybe on the balance sheet, if spot prices persist, it looks like you could be net cash by the end of the year. Can you talk a little bit, Ramón, about how you think about the balance sheet going forward? Should we think about gross debt coming down? Or should we think about you guys going into a higher net cash position?

--------------------------------------------------------------------------------

Ramón Barúa, Hochschild Mining plc - CFO [3]

--------------------------------------------------------------------------------

Yes, sure. Thank you, James. The -- it is very interesting, during the month of July, for example, we had some deposits, savings deposits here in Peru, where we were making more money than the cost of the debt that we have right now. So with this ability of bringing the cost down and seeing interest rates -- I mean, the trend of interest rates in the U.S., and it's following here in Peru, of being even lower is not creating us any incentive to repay the debt. But certainly, if we have cash on the balance sheet and we -- the first use of that will be to continue developing the areas at Inmaculada, continue doing brownfield exploration. But if there are excess -- continues to be excess cash, we'll certainly repay the debt if we do not need it.

Having said that, as Ignacio pointed out, we are also looking at M&A opportunities. You know that we are -- typically take those very slow because we like to look for opportunities when we can -- where we can make money from day 0. But if there is an opportunity like that, I mean cash is very dear to us because that's our primary source of funding these type of acquisitions.

--------------------------------------------------------------------------------

James Andrew Keith Bell, RBC Capital Markets, LLC, Research Division - Analyst [4]

--------------------------------------------------------------------------------

Okay. Makes sense. And then just one on Inmaculada. Obviously, you saw the increase in resource grade at Millet. Is there further drilling planned there? And could we see further improvements in time? And then maybe as an extension of that, can you remind us what the improvement was at Angela vein from resource to reserve to mine grade?

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [5]

--------------------------------------------------------------------------------

Yes. James, this is Ignacio. So initially, what we had anticipated for the year, what we had budgeted for the year was to do the infill drilling of the area that we just finished, and it's the one that is closest to Angela vein. Unfortunately, that area is not necessarily the widest or the richest in grade of the deposit, but it's the one that is going to be getting into production first based on our production plan. So -- and the rest of the plan is to do the infill in the Divina vein, which we are halfway through.

But based on these results and based on the fact that we have to do the work anyway, we initially had budgeted it to be done in 2020, we are evaluating the possibility of advancing that infill work and trying to see if we can also complete the infill drilling of the rest of Millet and the rest of Divina and other structures into 2019. We have not made a decision yet, but we're evaluating that possibility because it's just a question of moving it from one year to the other. And since we are getting such a positive reconciliation of grades from one to the other, maybe it's better to do it sooner rather than later.

And regarding the grade reconciliation in Angela, I don't have it on the top of my head, but I would say it's probably around those same levels, probably a little bit less. I will have said that it was somewhere between 15% and 20%. So this is very positive reconciliation.

--------------------------------------------------------------------------------

James Andrew Keith Bell, RBC Capital Markets, LLC, Research Division - Analyst [6]

--------------------------------------------------------------------------------

Okay. That makes sense. And then just one quick one, final one is, if we were to see spot prices persist towards year-end, would you consider changing your pricing for resources and reserves? And would it have any impact on your strategy in terms of the brownfield exploration?

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [7]

--------------------------------------------------------------------------------

Yes. In terms of evaluating the prices that we use for calculating our reserves and resources, I would say we will need to wait until the end of the year to make that decision because we need to understand better what the perspectives of the (inaudible) are at that point, which is something that we do every year. So I would say it's still early to say.

But what I can tell you is that in terms of our production plans, in terms of our exploration and -- decisions and our control decisions, we are always looking at the spot prices permanently. So if there are things that right now at these prices are profitable, we're definitely going to be looking at putting those into production. So it's -- that's something that is fairly flexible.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

And our next question comes from Ian Rossouw with Barclays.

--------------------------------------------------------------------------------

Izak Jan Rossouw, Barclays Bank PLC, Research Division - Director [9]

--------------------------------------------------------------------------------

Just 3 questions. Just to follow up from James' question on these grade reconciliations, does that imply that if there is -- if you do bring that forward, you could see some upside to your plans at Inmaculada for this year, the production plans?

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [10]

--------------------------------------------------------------------------------

That will be the goal, yes. That will be the goal. So we would expect that positive reconciliation is going to continue also in the rest of the Millet vein. So if that was the case, that would imply an overall upgrade in the entire deposit with an ensuing improvement in our long-term production plans as well. So that's the goal, but we think we need to prove that.

--------------------------------------------------------------------------------

Izak Jan Rossouw, Barclays Bank PLC, Research Division - Director [11]

--------------------------------------------------------------------------------

Okay. So -- but it's not near-term production as in for this yea. It's more in the Millet vein beyond -- for the next couple of years, is it?

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [12]

--------------------------------------------------------------------------------

Oh, yes.

--------------------------------------------------------------------------------

Izak Jan Rossouw, Barclays Bank PLC, Research Division - Director [13]

--------------------------------------------------------------------------------

Making sure.

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [14]

--------------------------------------------------------------------------------

Yes. That's for the next couple of years, exactly.

--------------------------------------------------------------------------------

Izak Jan Rossouw, Barclays Bank PLC, Research Division - Director [15]

--------------------------------------------------------------------------------

Okay. Fine. And then just the second question on -- Ramón, you were mentioning around working capital, that sort of temporary movements and that should iron out. Is that what -- are you implying that we should expect this $23 million of working capital outflow to come back in the second half? Or I mean I see the biggest chunk of that was receivables, and I assume that's because of higher prices. So just wanted to get a little bit more details on that.

--------------------------------------------------------------------------------

Ramón Barúa, Hochschild Mining plc - CFO [16]

--------------------------------------------------------------------------------

Yes. No, this is early, and with -- due to higher prices, we're not seeing a lot of that impact yet. But it has to do mostly with things that happened in the first half that will not happen in the second when we are comparing the -- and then I think the working capital from June to -- with December. So my expectation is that mostly all of that will disappear. Maybe if something will stay at the end of the year is if we repeat the situation of last year where we had some products in process. But short of that, in terms of the business, there's nothing structurally that suggests that we will have a higher working capital this year than what we had last year.

--------------------------------------------------------------------------------

Izak Jan Rossouw, Barclays Bank PLC, Research Division - Director [17]

--------------------------------------------------------------------------------

Okay. But from a cash perspective, because I mean I think some of those working capital numbers you show in your reporting is not all cash basis, but I'm just looking at the cash flow statement, and that had about $23 million outflow. Do you see -- do you expect most of that to come back in the second half?

--------------------------------------------------------------------------------

Ramón Barúa, Hochschild Mining plc - CFO [18]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Izak Jan Rossouw, Barclays Bank PLC, Research Division - Director [19]

--------------------------------------------------------------------------------

Okay. Cool. And then just lastly, on the cash taxes, I mean if you strip out the export taxes and royalties, it looks like you paid about $3 million in this period. And I recall you had said in the last few years that you are running out of your tax shields in Pallancata in 2018. So I just wanted to get some update on that. Also, when do you expect to start paying cash taxes at Inmaculada? And then maybe just, at current prices, what do you expect the sort of cash tax excluding royalties and export taxes to be for this year and next year? Just to get a sense of the sort of order of magnitude, if you don't mind.

--------------------------------------------------------------------------------

Ramón Barúa, Hochschild Mining plc - CFO [20]

--------------------------------------------------------------------------------

Sure, sure. I mean to give you some order of magnitude, in the case of Peru, this year, we continue to expect to pay 0 because we had the tax shields from the investment in Inmaculada. And then we had already some advances in tax payments from previous years that we can use to neutralize the tax payments in 2019. That effect will disappear for next year. And next year, we would expect to pay 2 things. First, I would say, at these prices, we will be paying around $12 million of taxes in Peru. Plus, there will be our workers' profit sharing of around $3 million, okay, that we were not paying also because there were no taxes. So that -- those will be effects for 2020.

In Argentina, as you point out, we have paid -- our expectation is to pay around $4 million in taxes for the year. And my best note, that's what you are seeing being paid in the first half, half of that. And our basic expectation will be that, that same number will be repeated in 2020.

On top of that, of course, we have the royalties that you mentioned in Peru that we pay around $7 million per year. And that is booked also in the income tax line. The export taxes that you mentioned going to the selling -- into the selling expenses and the royalties in Argentina are already included in the cost line.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

And our next question comes from Daniel Major with UBS.

--------------------------------------------------------------------------------

Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [22]

--------------------------------------------------------------------------------

Three questions. Firstly, on the exploration side and, just to be clear, on the permitting, can you -- could you just tell us exactly what permits you still need to receive to conclude your planned drilling for this year and how confident you are in terms of the receipt of those payments and also -- those permits, sorry? And then also, in terms of the confidence in lifting group resources this year as a consequence of those drilling programs. That's the first question.

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [23]

--------------------------------------------------------------------------------

Okay, Daniel. So on that front, remember that, in the case of Pallancata, we had, I would say, 4 areas that we're looking for the permit, which were Palca, Cochaloma, Pablo Sur and Corina. In the case of all of them, the critical permit is always the environmental permit. In those 4 target areas, we already have the environmental permits, okay? So that's done. In the case of Palca and Corina, we already have the exploration permits, which are given by the Minister of Energy and Mines, that are something more operational and quicker. We already have those, and we are drilling those 2 areas. The final permits that we're waiting for are the ones for Cochaloma and for Pablo Sur. We are 100% confident that we're going to be getting those permits. The main question there is the exact timing of how long. It could 1 week, 2 weeks, 3 weeks, we don't know. But that we are going to be getting those, we are 100% confident.

And in terms of our expectations for the year, I would say, since we have started recently the work on Palca and Corina, we have not started yet with Cochaloma and with Pablo Sur, my -- we're still expecting to start that campaign, to start getting some potential resources to have a better idea of how many resources we're going to be able to find this year for Pallancata. So that is still more in the undetermined side.

In the case of Inmaculada, I would say, with the things that we're already finding, our level of confidence is significantly higher that we're going to be bringing significantly more answers by the end of the year.

And in the case of San Jose, we are already working on a structure that is looking very attractive, which is the [Entorel] structure. But again, a lot of the drill program to come up with actual inferred resources is completely towards -- geared towards the second half of the year. Also, I would say, on that front, I would still like to advance further our exploration campaign before giving you any forecast on the -- on what you should look at, at the end of the year.

--------------------------------------------------------------------------------

Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [24]

--------------------------------------------------------------------------------

Okay. And then a second question around -- for -- perhaps one for Ramón on the care and maintenance costs. You booked some care and maintenance costs in the first half at both Arcata and also Ares. Can you give us your expectations through the balance of this year and then into 2020 on a sort of ongoing basis, total estimated care and maintenance costs? And is it fair to assume that, that will continue to flow through the other expenses line within the financial statements?

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [25]

--------------------------------------------------------------------------------

Yes. Daniel, this is Ignacio. Let me talk about the actual operational requirements for that, and then I will hand it over to Ramón to talk about how that is going to be treated financially speaking. But on the Ares front, we had 2 different types of charges. One was the one related to the redundancy payments for the worker. And that's a one-off, and that's complete. And now we have around 36 people that are working on the mine with the goal of making sure that the security is in place, that the assets undergoing maintenance are properly maintained, that wherever we need to do pumping and ventilation, that we do that. So that's the bare minimum amount of people that we have identified that we need for the operation, and that is going to continue. So we would expect that, that is going to cost us around $3 million between the people and the actual operating expenses per year. We're obviously always trying to reduce that number. But that's what we anticipate that is going to take us, particularly if we want to be doing that drilling campaign in which we need to make sure that we have the people taking care of whatever is required by the exploration work.

In the case of Ares, it's a little bit different. Ares, what we have there is we have the tailings dam that we need to close. We have been working on closing that tailings dam. Part of that is already in the provision. But there are certain other things particularly related to the treatment of the water that are not necessarily accrued yet in the -- in micro-supervision. So those are the expenses that we are incurring and we're probably going to be incurring in 2018 -- in '19 and 2020 and hope -- and probably sometime in 2021. So it should be there for the next, I would say, at the most, 2 years. And after that, we will expect to completely close that tailings dam. And with that, the expenses we need to [commit] in terms of Ares should go down materially compared to what we are seeing today.

--------------------------------------------------------------------------------

Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [26]

--------------------------------------------------------------------------------

Okay. So when I add the 2 together, is the sort of 6 -- $5 million to $6 million sort of run rate on an annual basis for the next 2 to 3 years a reasonable amount?

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [27]

--------------------------------------------------------------------------------

Yes. I would say, in the case of Arcata, as I told you, it should be around $3 million in the first half of the year. This year has been a little bit higher because there was a slowdown in the amount of people, so we couldn't go from 1,000 people to 36 straight on. So we had to -- certain work that we needed to stop bit by bit, so the charge in the first half is larger than what it should be going forward. But I would say, with $3 million per year, you should be in the ballpark.

And in the case of Ares, we are now targeting that number to be also around an additional $3 million per year for the next 2 years only.

--------------------------------------------------------------------------------

Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [28]

--------------------------------------------------------------------------------

Okay. Very clear. And then a final kind of question, obviously, I guess, slightly to follow on from the balance sheet question. In terms of your M&A outlook, I think, slightly -- just some investors at your Investor Day, I think it was last year when you were talking about investments outside of the precious metals space. How are you looking at that now? I mean are you looking at M&A opportunities in other areas actively at the moment?

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [29]

--------------------------------------------------------------------------------

We are permanently looking at M&A opportunities, Daniel, all the time. I would say we look at all the opportunities, as we have mentioned in the past, in 2 fronts. One of the fronts is on gold and silver in the Americas, and that's something that we are permanently evaluating opportunities. We evaluate many of them even to a significant amount of detail permanently, and every year, we look at 3 or 4 in a lot of detail. And obviously, we only move with the ones that we really like. So that's something that is ongoing and will continue.

But as we have mentioned in the past, we have also started to look at other opportunities that could be attractive to the company and things that play to our competitive advantages of being operators in the Americas in processes that are fairly related to the things that we know how to do and that play well into our operational and technical skills in general and also to our knowledge and presence in the Americas. So we are looking at those. Those are mostly related to the battery metals that we have talked about in the past.

So we, again, are permanently evaluating opportunities on that front. And -- but what I can tell you is that if we -- in both cases, if we are going to be presenting something, that will be something that fits very well with our skills, with our capacities, with our resources and our teams that -- and which we believe we could add significant value and generate material value for our shareholders. If those conditions are not present, we are going to be passing on those opportunities.

But always, always, Daniel, always keeping in mind that we are a gold and silver company. And that's going to continue being the main driver of our business.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

(Operator Instructions) We'll take our next question from Michael Stoner with Berenberg.

--------------------------------------------------------------------------------

Michael Stoner, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [31]

--------------------------------------------------------------------------------

So one quick one on Pallancata. We've noticed that the OpEx has been trending down and just wanted to check whether that's all higher throughput tonnes, and that's kind of operating unit cost. Or are there kind of cost initiatives in there that are kind of dragging cost down? And then more widely across the group, are there any other ongoing cost initiatives that we can expect to have an impact over the next 6 to 12 months?

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [32]

--------------------------------------------------------------------------------

Yes. No, I would say, in general, you have to recall that, particularly when gold and silver prices are high, we tend to see a lot of inflation in our key cost components. We see labor going up significantly. We see the cost of the contractors going up, drilling costs going up. So we permanently have to fight those natural inflation that we see in the mining sector. So we always have in mind and implementing many different alternatives to make sure that we, at least, counter-effect those pressures, external pressures. So we're permanently looking at initiatives. Yes, we have seen one of them. And I can mention a few others in terms of electricity savings and productivity and such.

But I would say, in general, the key driver for what you are seeing in the reduction in the cost per tonne in Pallancata is by far the fact that we are now mining the Pablo vein, which is a big vein, and we are doing it at pretty much full plant capacity, which was not the case in 2018. 2018, we were mining below full plant capacity because we were focusing on the higher-grade areas in the Pablo Piso structures. Now we are going 100% with Pablo, so you're going to see that the grade is lower but the throughput, the [turnout] is significantly higher. And that is giving us the efficiencies in the cost per tonne, but it is in the guidance for what we anticipated in terms of all-in sustaining cash costs per ounce.

--------------------------------------------------------------------------------

Michael Stoner, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [33]

--------------------------------------------------------------------------------

Okay. Perfect. And then one more on Pallancata. You mentioned earlier in the call that you were expecting higher development rates in the second half. Is there any chance you can share broadly the kind of incremental million dollar spend on extra development versus the first half?

--------------------------------------------------------------------------------

Ramón Barúa, Hochschild Mining plc - CFO [34]

--------------------------------------------------------------------------------

Sure. This is Ramón. Let me go to Page #8. And you can see there on that chart on the left that the CapEx for Inmaculada for the period was $14 million, and the guidance is $30 million to $34 million. We intend to continue to be in the -- within the guidance range, probably towards the higher end of the range, but that gives you an idea of what's the additional for the second half of the year.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

And our next question comes from Tim Huff with Peel Hunt.

--------------------------------------------------------------------------------

Timothy Alan Huff, Peel Hunt LLP, Research Division - Analyst [36]

--------------------------------------------------------------------------------

Just a couple of numbers questions actually. And I had to drop off the call for a bit, so I apologize if I ask this again. But the -- just firstly, on depreciation, we saw depreciation creep up both in Inmaculada and Pallancata. I was just wondering, separately or together, was there any reason for that? I mean it wasn't anything major. It's noncash anyway, but I thought I'd at least ask.

--------------------------------------------------------------------------------

Ramón Barúa, Hochschild Mining plc - CFO [37]

--------------------------------------------------------------------------------

Sure. No, the main reason for the depreciation going up is you know that our depreciation is based on -- in 2 main things. First, of course, the historic investment, but it also incorporates the future investment. So now that we have incorporated lots of new veins, in the case of Inmaculada, we have to adjust depreciation to incorporate the future CapEx associated to developing those. So based on a very preliminary mine plan because as you know, we are still doing a lot of infill work, we have assessed how much -- I would say, on a conservative basis, how much the future CapEx could be. And that is being plot already into our depreciation charge, and it's showing through the P&L.

--------------------------------------------------------------------------------

Timothy Alan Huff, Peel Hunt LLP, Research Division - Analyst [38]

--------------------------------------------------------------------------------

Okay. So that -- the step-up that you took this half incorporates the future CapEx.

--------------------------------------------------------------------------------

Ramón Barúa, Hochschild Mining plc - CFO [39]

--------------------------------------------------------------------------------

That is correct.

--------------------------------------------------------------------------------

Timothy Alan Huff, Peel Hunt LLP, Research Division - Analyst [40]

--------------------------------------------------------------------------------

Okay. So we -- I mean I -- we shouldn't be expecting further step-ups as we go through the year or into next year.

--------------------------------------------------------------------------------

Ramón Barúa, Hochschild Mining plc - CFO [41]

--------------------------------------------------------------------------------

What that will depend on, Tim...

--------------------------------------------------------------------------------

Timothy Alan Huff, Peel Hunt LLP, Research Division - Analyst [42]

--------------------------------------------------------------------------------

I'm trying to figure out how far into the -- yes.

--------------------------------------------------------------------------------

Ramón Barúa, Hochschild Mining plc - CFO [43]

--------------------------------------------------------------------------------

Yes, sure.

--------------------------------------------------------------------------------

Timothy Alan Huff, Peel Hunt LLP, Research Division - Analyst [44]

--------------------------------------------------------------------------------

Just trying to figure out how far into the future you're actually looking.

--------------------------------------------------------------------------------

Ramón Barúa, Hochschild Mining plc - CFO [45]

--------------------------------------------------------------------------------

Yes. We are looking as far as our resources support. And any increases or decreases associated to depreciation, we will have to do with our expectations of how the cost of developing those additional resources will cost us. So for example, if we were to see an increase in rates of the contractors, that will not only affect us today, but it will also affect the future CapEx associated to developing those resources. So the depreciation charge today is based on future expectations of resource development. It's a little bit tricky, but that's the policy.

--------------------------------------------------------------------------------

Timothy Alan Huff, Peel Hunt LLP, Research Division - Analyst [46]

--------------------------------------------------------------------------------

Okay. The second one was on the balance sheet, coming back to debt again, just a slightly different angle at it. You obviously don't have anything in the long-term category. All $158 million is in the short-term category. Just looking at, even including the working cap inflow that you could get in the second half of the year, it doesn't look like -- I mean it looks like you'd be paying down maybe, at most, about $50 million of debt, and then you'd be left with about $100 million left in the short term for the coming 6, maybe 12 months. I would have thought probably -- I mean, given that you're already so low and cash is pretty key right now, despite the step-up that you're expecting in the second half, you probably would have rolled some of the short term. Is that what you guys are thinking right now? Or are you just going to keep options open as you go towards the year-end and into next?

--------------------------------------------------------------------------------

Ramón Barúa, Hochschild Mining plc - CFO [47]

--------------------------------------------------------------------------------

Yes. No, of course, I mean the idea -- I mean the primary idea will be to roll it up. Now as cash builds up, as James was saying, I mean our responsibility as management of the company is try to deploy that money in mining opportunities, either in our operations or in ideas that we can bring to the table. So we feel challenged by having those positive cash balances and pushes us to think about how to offer our investors a return. If we do not find any suitable alternatives, yes, the alternative will be to repay the debt. But at this point, given the very low cost, it suggests that continue to refinance that and push it down the line continues to give us the opportunity of acting quickly on value opportunities.

--------------------------------------------------------------------------------

Timothy Alan Huff, Peel Hunt LLP, Research Division - Analyst [48]

--------------------------------------------------------------------------------

Yes, okay. And then the last one was just on Arcata. Back at the Capital Markets Day, you guys quoted your one-off costs at around $17 million, $18 million plus $3 million in care and maintenance per annum . Looking at your one-off that you took of $12 million for the first half, are you guys expecting the other $9 million to sort of come through in the second half?

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [49]

--------------------------------------------------------------------------------

No, this is Ignacio. No, actually, the $17 million to $18 million that we initially forecasted for the redundancies was fortunately a lower number. So it was around $12 million, and that's a one-off, and that's it. And we continue expecting to see the care and maintenance at $3 million as we anticipated.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

(Operator Instructions) We'll take our next question from Patrick Jones with JPMorgan.

--------------------------------------------------------------------------------

Patrick Jones, JP Morgan Chase & Co, Research Division - Analyst [51]

--------------------------------------------------------------------------------

Just a question on just the innovation programs on the ore re-sorting. It's obviously something that, I think, is getting a bit more attention in the market. Anglo is obviously attempting something in their own area. But you mentioned that, obviously, you think this can deliver some type of improvement at Inmaculada. I was interested if you think this could be rolled out any -- across any of the other operations, Arcata and San Jose. And also, what do you think is sort of the time line for looking at this beyond a pilot plant? Is this something that we could start to see a material impact on the operations, still bring some improvement materially within about a 5-year view? Is that realistic?

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [52]

--------------------------------------------------------------------------------

Yes. We -- I mean we are starting to do that test in Inmaculada because we already have identified an opportunity for using that. So that's where the focus is. However, if this works, this could work in many different -- other different deposits. Could be our deposits or other deposits that are currently not attractive and that we could put into value with that technology. So basically, the short answer is if it works for Inmaculada, it will work in many other areas. And so far, the results we are getting for Inmaculada are encouraging. We are targeting to have the visibility complete by the end of this year. And to put this into operation, it's probably going to take us 1 to 1.5 years by that time we include permits and everything. So it's not the next 5 years, but it could be somewhere between the next 2 to 3 years in -- when we have it operational. And obviously, once we prove that it works for Inmaculada and once we have a good visibility and we work on the implementation project for this, we are going to start also evaluating opportunities for using that technology elsewhere.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

And it appears there are no further questions in the phone queue at this time. Mr. Bustamante, I would like to turn things back to you for any closing or additional remarks.

--------------------------------------------------------------------------------

Ignacio Bustamante, Hochschild Mining plc - CEO & Director [54]

--------------------------------------------------------------------------------

Thank you very much. Thank you, everybody, for participating in today's call. And should you have any additional questions, please free to contact Charlie Gordon directly at our London office. Thank you very much, and I look forward to seeing you all soon in September when we are in London. Bye.

--------------------------------------------------------------------------------

Ramón Barúa, Hochschild Mining plc - CFO [55]

--------------------------------------------------------------------------------

Thank you. Bye.