Hochschild Mining's (HCHDF) CEO Ignacio Bustamante on Q2 2014 Results - Earnings Call Transcript

Jul.16.14 | About: Hochschild Mining (HCHDF)

Start Time: 09:07

End Time: 09:29

Hochschild Mining PLC (OTCPK:HCHDF)

Q2 2014 Earnings Conference Call

July 16, 2014 09:00 AM ET

Executives

Ignacio Bustamante - CEO

Ramón Barúa - CFO

Charlie Gordon - Head of Investor Relations

Analysts

Stephanie Boswell - Bank of America Merrill Lynch

Guy Rodwell - Clay Asset Management

Roger Bell - JP Morgan Cazenove

Operator

Good afternoon ladies and gentlemen, and welcome to the Hochschild Q2 2014 Production Results Conference Call. My name is Mabry and I will be your coordinator for today’s conference. For the duration of the call, you will be on listen-only. However, at the end of the presentation, you will have the opportunity to ask questions. (Operator Instructions)

I’ll now hand you over to Mr. Ignacio Bustamante, CEO to begin today’s conference. Thank you.

Ignacio Bustamante

Thank you -- everyone to our second quarter production conference call. Ignacio Bustamante, CEO; [ph] [behalf] on the call Ramón Barúa, our CFO; and in London Charlie Gordon, our Head of Investor Relations.

A very brief summary of what we published this morning and the call over for questions. We delivered a strong operational performance with Q2 production of 5.9 million silver equivalent ounces, of 4.3 million ounces of silver to 28,000 ounces of gold. We produced some 11.9 million silver equivalent ounces. We are on track to hit our full-year target of 21 million ounces.

First half was flattered by a better than expected final contribution, closed Ares operation. To our individual operations, total silver equivalent production in Q2, 2004 (sic) [Q2, 2014] 1.6 million ounces, a proportion of material from stopes and developments. Higher grades and recoveries, of course lower tonnage. Material is now partially replacing as we expected, process from the low-grade Macarena Waste Dam Deposit.

Performance for the first half, 2.4 million ounces, an improvement on the first half of 2013.

Ramón Barúa

Ignacio, sorry to interrupt, but you’re getting cut. Hello?

Ignacio Bustamante

Yes.

Ramón Barúa

Ignacio, sorry to interrupt. This is Ramón Barúa, but you’re getting cut. I have your script, so let me continue from here.

Ignacio Bustamante

Okay.

Ramón Barúa

Okay. Sorry, I’ll go back a little bit. We have again delivered a strong operational performance in Q2 production of 5.9 million silver equivalent ounces which consist of 4.3 million ounces of silver and close to 28,000 ounces of gold. Overall, in the half, we produced some 11.9 million silver equivalent ounces which means we’re on track to keep our full-year target of 21 million ounces, although the first half was flatter by a better than expected final contribution from the now closed Ares operation.

Turning to our individual operations, Arcata total silver equivalent production in Q2, 2014 was 1.6 million ounces, with a greater proportion of material from stopes and developments leading to higher grades and recoveries, but of course lower tonnage.

This material is now partially replacing, as we expected, volumes processed from the low-grade Macarena Waste Dam Deposit. The total performance for the first half was 3.4 million ounces, a pleasing improvement on the first half of 2013.

The Pallancata mine in Peru and San Jose, Argentina, enjoyed solid quarters with both operations increasing tonnage. Pallancata produced 2.3 million ounces, a 12% increase on the first quarter, which brought the total for the half to 4.4 million silver equivalent ounces. At San Jose, we delivered 2.8 million ounces, which was in line with the first quarter and 5.6 million ounces for the half as a whole.

Our small Ares mine was, as expected, closed in the second quarter, but we did manage to deliver a better than expected production number of 626,000 ounce, driven by consistent grades. Overall, the first half number was 1.2 million silver equivalent ounces, which was actually a considerable increase on this time last year.

At our key Inmaculada project, the contractor Graña y Montero started construction of the plant in late March and by the end of the period, progress has reached almost 30% completion and we’re on track for the start of commissioning at the end of the year.

We have also finished the equipment procurement process and made more excellent headway underground with an additional 1,000 meters of tunneling, which brings the total overall for the site to just over 13 kilometers since we began the project.

The cash flow optimization program has now delivered on its target of approximately $200 million in efficiencies, but in the last few months we have maintained the momentum and have identified further cost initiatives in all areas of Hochschild, including operations, administration, and exploration. I’m confident that you will see more evidence of the success of these ongoing programs in the second half.

The cash balance at the end of the quarter is $225 million, which reflects ongoing ramp up of expenditure on the Inmaculada plant whilst our minority investments are currently valued at approximately $40 million.

We have also taken advantage of the recent bounce in silver prices to forward sell a further 2 million ounces of silver from the period of June to December to provide us with further cash flow certainty in a heavy CapEx period for the company.

With that, I’d like to open-up for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Stephanie Boswell from Bank of America Merrill Lynch. Please go ahead with your question.

Stephanie Boswell - Bank of America Merrill Lynch

Yes, hi. Good afternoon, everyone. It’s Stef Boswell here from Bank of America Merrill Lynch. My first question is on Inmaculada and I just want to understand whether or not we should be expecting an update on the operating assumption to the projects? I believe the last set of assumptions were updated back in 2012 and obviously cost have moved on somewhat since then and, so just really some color on whether or not we should expect an update to that?

Ramón Barúa

Hello, Stephanie. This is Ramón again.

Stephanie Boswell - Bank of America Merrill Lynch

Hi, Ramón.

Ramón Barúa

Hi. How are you?

Stephanie Boswell - Bank of America Merrill Lynch

Good. Thank you.

Ramón Barúa

We remain confident with the assumptions that we have given the market regarding a cost and an operating assumptions for Inmaculada. Certainly as we approach the beginning of production, the uncertainty is going to be a reduced and there might be certain adjustments. Of course I do expect there to be adjustments, but what we expect so far are within reason of what we announced to the market. So there shouldn’t be at this point any material differences. Again, as we approach the start of operations or as we beginning the trials in the platform, we will certainly update the market on that front.

Stephanie Boswell - Bank of America Merrill Lynch

Okay, thanks. And my second question was with the ramp up in project spend on Inmaculada and obviously with the redemption of your converge in -- for Q3 this year, do you foresee any need to draw upon your short-term credit lines in Peru or do you deem your cash balance to be sufficient to do that?

Ramón Barúa

Thank you. I mean, in theory the refinancing that we completed at the beginning of the year included both the refinancing and the money that we needed for Inmaculada. At this point what I can tell you is that without any short-term debt, what we’re trying to do is ensuring some certain credit lines with the local banks, shows we need to withdraw a -- on additional debt. The expectation on that it certainly has -- the expectation on [ph] [withdrawing] on that has to do certainly with how the prices perform. What I can tell you is certainly with prices of $21, $22, we feel more comfortable. But a month ago we saw prices of between $18 and $19. On that $4 difference makes a big -- makes also a big difference for us. So it will depend on how the prices evolve going forward. At this point, again, we have full availability of our short-term lines in Peru and we’re working on increasing and formalizing certain of those activities should we need them in the future.

Stephanie Boswell - Bank of America Merrill Lynch

Okay, perfect. Thanks. That’s all of my questions.

Operator

Thank you. And our next question comes from the line of Guy Rodwell from Clay Asset Management. Please go ahead with your questions.

Guy Rodwell - Clay Asset Management

Yes, hi there. Thanks for the call. Yes, just some, few questions. Inmaculada, this is a follow on from the previous one, what is the current timing that you’re guiding for in terms of the ramp up and then going -- moving towards full production? My understanding was that you were heading towards full production going into 2015-2016 and is that still the case? Secondly, on San Jose, what’s the latest on cost, given situation in Argentina et cetera? Can you just give a quick update on that? And then, what’s your current guidance for the all-in sustaining cost per ounce in coming months? So -- yes, that’s it basically.

Ramón Barúa

Excellent. Look, regarding the Inmaculada ramp up everything continues as expected. The guidance that we gave is, was that, that plant was going to be completed and the project was going to be completed in the fourth quarter of this year. We maintained that target. Of course when we start operating -- this year we planned on starting with our first field and the ramp up will occur within the first six months of next year. And we do expect to finish 2015 producing at full speed in Inmaculada.

Regarding the San Jose costs, we’re doing very well on two fronts. Now first on the operational efficiencies that we have targeted as part of the cash optimization plan. I can tell you that those have resulted in very attractive savings in San Jose and plus we had at the beginning of the year; you must remember an important evaluation that was favorable of course to our dollar-denominated cost. Part of that benefit has been also in, over shadowed by additional inflation in the country, not all but a partial offset of that benefit has occurred.

But I can tell you that overall the impact in the year has been positive out of those two models. In terms of the guidance in the all-in sustaining cost, what we guided for the year was a reduction between 0% and 5% for that number. And again given the improvement and the messaging that we have been giving you about the cash optimization plan and that we’re better than expected. We expect to be within the most aggressive part of that range at least during the first half of the year.

During the second year as we modulate production a little bit to reach the target you’ll see that the production rate in the first half has been much better than the 50% of the overall target. We expect there to be -- there might be some adjustment, but we’re in the right track as we continue to look for efficiencies in the company. So we’ll remain positive that we can continue to push the cost further down.

Guy Rodwell - Clay Asset Management

Okay, so we’re looking at some going towards $18 per ounce and is that a reasonable assumption or less I suppose, an announcement?

Ignacio Bustamante

The guidance I think implied for the operations, sorry, I don’t recall this number precisely, but I think it was $18.3.

Ramón Barúa

Exactly. So coming down from like $18.7 last year and reducing by between north to 5%.

Guy Rodwell - Clay Asset Management

Okay, great.

Ramón Barúa

Thank you.

Guy Rodwell - Clay Asset Management

Thank you.

Operator

Thank you. And we currently have no further questions coming through. (Operator Instructions) We do have another question coming through from the line of Roger Bell from JP Morgan. Please go ahead with your question.

Roger Bell - JP Morgan Cazenove

Hi, Ignacio. Hi, Ramón. Thanks for the call. Yes, two questions actually just on the trajectories or cash flows during the year. What was the split of CapEx in the first half versus the second half? I’m thinking specifically Inmaculada and in general for the group. And then in terms of working capital you had, you sort of produced a little bit more than you sold in the second quarter. So, is it fair to say that you had a little bit of a working capital increase during the quarter that might have been a slight drag on the cash flow?

Ramón Barúa

Yes, Roger. In terms of CapEx for Inmaculada so far in the year up to June we have spent around $65 million, a little bit more than that. So the remaining number is around $133 million -- $134 million, adding up to close to the $200 million that we had budgeted. In terms of working capital, yes, typically for the half there might be some delays on certain sales, but those are only temporary movements. Typically at the end of the year we’re able -- we have always been able to correct for that. There has been also an increasing working capital due to the value added taxes that we’re paying on Inmaculada, but we’re already working with the Government of Peru which has approved our investment, and during the second half we should see a preliminary return of that VAT -- an advance return of that VAT helping to get the working capital back to normal and recovering some of the cash that has been used for that.

Roger Bell - JP Morgan Cazenove

Okay, so it does look there’ll be some working capital benefit in the second half coming through which should help the cash balance?

Ramón Barúa

That is correct.

Roger Bell - JP Morgan Cazenove

I think those are all my questions. Thanks very much.

Ramón Barúa

Thank you.

Operator

Thank you. And we have a follow on question from the line of Guy Rodwell from Clay Asset Management. Please go ahead with your questions, sir.

Guy Rodwell - Clay Asset Management

Hi. Can you just give a quick update on where you see the silver price heading with the main point that at the moment, it had a little bit of a rebound et cetera, now what's your view on it?

Ramón Barúa

No, when we relieve we continue to be very bullish on gold and silver prices, and again we’re investing in the Inmaculada project precisely because we are confident that the prices will go at to higher levels to where they’re trading right now. As I mentioned earlier, what we have seen is a lot of volatility in the silver price. Again two or three weeks ago we were -- in dollars and then back to $21, $21.5. We believe that for the year, we expect to be in the higher range of these prices. But again as you have seen we’ve done some hedging because given this, that this is a transition year, an important investment year for us. We would like to ensure the cash flows are at those relatively high levels and that’s why we did the hedging. So, we expect little bit of volatility, but we have taken the opportunity to capture some of the better moments in prices.

Guy Rodwell - Clay Asset Management

Okay, thanks a lot. Sorry, just another follow on question. The reserve position at Inmaculada at the moment, can you just sort of remind us what it is and the conversion of reserves into 2P and what could possibly be the trajectory of that over time, and presumably as you expand beyond Angela and go into the upper vein some surrounding that main vein?

Ramón Barúa

Angela and Inmaculada, I think you mentioned Pallancata or am I wrong?

Guy Rodwell - Clay Asset Management

Inmaculada.

Ramón Barúa

Sorry. In Inmaculada, I mean, we have been developing -- right now we’re only developing the [ph] [Angela Vein] -- with the [ph] [Angela Vein] we have reserves for at least six years. We do believe that there is very strong evidence that the reserve in Angela will continue to grow. And we have also identified several others; I would call them more ancillary veins around Angela because they are not as important, as wide as Angela is. We have not developed any of those veins at this point. But again we have enough evidence that there will be significant growth in terms of additional reserves and resources going forward within those ancillary veins. But we have not spent money at this point in making mine developments to access those veins.

Guy Rodwell - Clay Asset Management

Okay, so in terms of the process the conversion of resources into reserves, what might be the timing of that kind of news flow that you can publish over the next few quarters?

Ramón Barúa

Probably I would say, yes, I mean, I wouldn’t expect that at least in a year, because most of -- again most of the energy and the CapEx is going to be put on developing the next few years which will come from Inmaculada not from those ancillary veins.

Guy Rodwell - Clay Asset Management

Okay, great. Thank you.

Operator

Thank you. And we have no further questions coming through. (Operator Instructions) And we have no further questions coming through, so I’ll hand it back to our host for any concluding remarks you may have. Thank you.

Ramón Barúa

Well, thank you very much everybody for joining this call. Thank you very much for your questions. Hope to talk to you in the next quarter. Thank you.

Operator

Thank you ladies and gentlemen for joining today’s conference. You may now replace your handsets. Thank you.

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