Exposure To Country Risk: The Hochschild Mining Edition

May.31.13 | About: Hochschild Mining (HCHDF)

Hochschild Mining (OTCPK:HCHDF) is a leading silver producer with a listing on the London Stock Exchange. Trading in the US is accomplished via the pink sheets. The company operates two mines in Peru (Arcata and Pallancata), one in Argentina (San Jose) with another one winding down in Mexico (Ares and Moris). Last year Hochschild Mining acquired the Volcan project in Chile gaining exposure to another jurisdiction. The company has a market capitalization of $814M and a forward P/E of 12.7. The table below lists the company's mines and projects along with information on production, reserves and resources. A silver-to-gold ratio of 50 was used to compute the silver equivalents given in this table.

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Leading on from an article on country risk exposure of silver mining companies which was based on 2011 data we are now updating our study using current 2012 year-end data. The present article will evaluate country risk exposure for Hochschild Mining. In previous work we have collated country risk ratings for numerous countries from eight different sources and averaged these ratings into compounded country risk scores. Our compounded country risk ratings range from 0 to 100 with low numbers indicating low risk and high numbers indicating high risk. The most recent results from this work can be found in this article. Most definitions of country risk include factors such as political risk, exchange rate risk, economic risk, sovereign risk, transfer risk, socio-economic risk and others. Depending on the source, various contributing factors of country risk are weighted differently. Readers interested in the specific definitions are encouraged to follow the links to our sources given in this article.

The asset profile shown in the first table above can be consolidated listing summations for each country of exposure resulting in the table below. The data is already calculated in percentages of gold-equivalent ounces. Country risk ratings as documented here are also shown in the central column of the table. The right side of the table shows the weighted risk contributions for each country separately for production, reserves and resources with summarized scores in the bottom line. The individual ratings can be interpreted as ratings going from present risk (production) into the future (inferred resource).

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Using production data as a basis the country risk computes to 49.38 indicating considerable country risk that is mainly driven by the San Jose mine in Argentina which accounts for 37% of production. This is a slight increase from last year's results. When considering reserve data the country risk rating drops to 44.35 due to additional contributions from the Inmaculada project in Peru. A further drop in country risk exposure can be observed when basing calculations on reserve data; the ratings drop to 31.3 for measured and indicated and 39.74 for inferred, mainly driven by the newly acquired Volcan project in Chile.

Compared to last year we observe a slight increase in country risk exposure when considering production data, and a decrease for all other categories which bodes well for the risk profile going into the future.

Note: last year's statistics did not differentiate between different resource classes.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.