Hochschild Mining PLC (OTCPK:HCHDF) Q2 2014 Results Earnings Conference Call August 20, 2014 9:00 AM ET
Charlie Gordon - Head of Investor Relations
Ignacio Bustamante - CEO
Ramón Barúa - CFO
Roger Bell - JPMorgan
Daniel Major - UBS
Good day and welcome to the Hochschild Mining PLC 2014 Half Year Results Conference Call. Today's conference is being recorded.
At this time I'd like to turn the conference over to Mr. Ignacio Bustamante, CEO. Please go ahead sir.
Thank you. Good afternoon everyone, and thank you for joining us today for our interim results presentation. This is Ignacio Bustamante. I would -- I have our CFO, Ramón Barúa, and in our London office we have our Head of Investor Relations, Charlie Gordon.
We have our presentation, so I want to walk you through the presentation and then I will hand the call over for any questions that you may have.
Moving into the first page, we talk here about the significant progress made during the first half in 2014. We start with the financial highlights with revenues of $282 million with -- compared to $308.6 million of the first half of 2013 with the difference mainly resulting from lower prices that were seen in the first half of the year, compared to those in 2013.
An adjusted EBITDA of $94.3 million compared to $90 million of the first half of 2013 despite lower prices.
Our profit before interest and taxes of $25.7 million compared to $1.2 million in 2013. And our profit before taxes of $9.1 million compared to a loss of $10.3 million in the first half of 2013.
Our EPS was negative $0.01 compared to negative $0.10 in 2013 and the reason why we are separating the profit before interest and taxes and the profit before taxes is because we use -- are very representative of the actual, the real situation and the EPS has a few things that Ramón will explain in further detail during his part of the presentation that we believe do not necessarily reflect the exact situation about our financial pillars of the company.
Talking about our cash flow optimization program, it exceeded our expectations with $270 million in savings compared to our $200 million guidance, very exciting final results of this program.
We obtained better than expected reductions in production cost, sustaining CapEx, administration and exploration expenses. Our all-in sustaining cash costs were lowered by 16% to a total of $16.8 per ounce.
Talking about our financial position highlights, we finished the half of the year with a cash balance of $226 million which gives us enough headway to finish with Inmaculada CapEx and to fully repay our convertible loan that expires in October of this year.
In addition to this, we have signed a term sheet for $100 million medium term credit facility with very positive condition. So all-in-all, a very strong improvement in our profitability despite the year-on-year price fall.
So these are the key highlights. Now I will hand the call over to Ramón Barúa, CFO so he can give you a little bit more detail on the financial figures.
Thank you very much Ignacio.
Please move to Slide number 5, where you can see our summary of our P&L. And I will start the slide on the bottom right corner showing the drop in prices that Ignacio mentioned and of course you are very well aware.
So despite that significant drop in silver prices you can see there on the chart on top, the net profit reconciliation and how an improvement in volumes in production cost, reduction in administrative expenses and exploration, together with some help of the FX position help us to fully overcome the effect of lower prices.
As a result of that, we have had an improvement in the gross profit margin and on the operating margin as highlighted by Ignacio on the first page.
There are two affects below that line that I would like to comment. The first one is relatively high finance expenses that we experienced in the period and those are explained by two main reasons.
Now the first one is that as you know we already have refinanced the convertible bond that expires in October with the bond that we issued at the beginning of the year. So for the period we have almost being paying double interest on that. That of course will go away once we repay the bond, the convertible bond in the coming months.
And the second effect is of course the interest related to that bond, which has a lot to do with putting Inmaculada into operation something that will occur at the end of this year. So we are basically taking the cost, but not taking the benefit so far. So we expect that -- the impact of that line will be significantly less important going forward.
That is taking us to our profit before taxes of $9.1 million as compared to a loss of $10.3 million in the first half of 2013. As you can see the tax number is also relatively high and there is a very big impact of approximately $6 million that has to do with our reduction in value of our Peso denominated tax base in Argentina.
As a result of the depreciation that we saw in that country in January, that has impacted negatively the tax position and we had to book all that impact in this half. After that effect we registered a loss of $1.5 million, which represents an EPS of negative $0.01.
Moving to the next slide, you can see there on the right of the efforts that we have gone by to achieve the $268 million of a cash optimization in the company.
As you can see this has come as a result of a reducing headcount, reducing remuneration throughout all levels of the company, reducing mine support, mine support by the way relates to HR, accounting etcetera all those type of activities in the mines, where negotiation with supplies and also reducing or postponing certain activities in the mine.
The result of all that, some of those lines do go into the all-in sustaining cost, others do not, for example the reduction in dividends or the reduction in exploration is not fully captured by the all-in sustaining cost, but you can see there that we have been able to reduce in our main operations from $19.09 per ounce in the first half of 2013 all the way down to $16.08 per ounce in this half.
The only thing that increases is the commercial discount and that is because we saw an opportunistic situation where we could sell some concentrate out of Arcata instead of producing doré, but we expect that of course once more than offset by a reduction in production costs, but you should expect to see that coming down in the coming months as well as we go back to producing doré from Arcata, a 100% doré from Arcata.
In the following slide we have -- we start talking about the balance sheet now. We have the reconciliation of our cash balance and you can see the most important effects there.
Of course the bond issuance at the beginning of the year together with the sale of some of our GRC position and then with those revenues or with those cash flows, we have been able to repay the bridge loan of course that we took in December of last year as part of the International Minerals acquisition, we have been able to invest $84 million in Inmaculada project.
We should -- we have repaid -- fully repaid our short-term lines in Peru. We only have at this point only $10 million still in Argentina and of course we have paid interest at certain bond related fees in the year.
The working capital is negative basically because of a value-added tax being accumulated in relation to the investment in Inmaculada, but we are following a process with a proven government that is going very well and in the coming months, we expect that situation to be reverted and recover that [BAP] (ph) well in advance of the -- with the commissioning of Inmaculada.
Moving to the next slide. So we have $226 million in cash. We have minority investment valued at $40 million. Most of that is reported as a subsequent event. We have been further selling our GRC stake and I can tell you that at this point, we only have a much less significant amount of shares.
We are fully funded to developing Inmaculada project and to repay the convertible bond and despite having a significant amount of short-term lines available, primarily here in Peru of $150 million, $200 million, we have secured a credit facility, basically there is we have signed a term sheet with a bank here in Peru in which they will provide these $100 million, we will have a commitment period of around six months. Then we will have a grace period of an additional year and then we will be able to repay those $100 million in the following three years.
All of that at a cost of around LIBOR plus 2.6%, so very attractive terms. And finally, as you are very well aware, our leverage to operating results is relatively high and given that this is a transition year for us, we have hedged a rather small portion of our production in order to protect the cash flows. The cash flows have ensured that the commissioning of Inmaculada runs very smoothly.
With that, I’ll pass the presentation back to Ignacio.
Thank you, Ramón. Moving to Slide 10, we talk here about which are our current priorities. We have three priorities at this point in time. We have first, to continue targeting further cost savings. Secondly, to strengthen further more our financial position and finally to work on the completion of Inmaculada on time and on budget.
Talking about the first one, additional cost savings, we have already obtained $270 million as we mentioned, exceeding our $200 million guidance. We continue working on targeting additional cost saving opportunities and those are mostly on the operational side continued, targeting opportunities for reducing dilution, improving metallurgy, getting better procurement conditions among other factors.
And finally with a strong all-in sustaining cash flows performance in the first half of the year with an all-in sustaining cash flows of $16.8 per ounce. So, all-in-all we believe that we are making very good progress in these priority.
In the second one, strengthen our financial position as Ramon mentioned, we already have these $100 million credit facility with a term sheet signed at very favorable conditions. We are fully funded for the project completion and for the convertible repayment and with short-term lines untapped between $150 million to $200 million. So also, we feel very comfortable from a financial standpoint.
And finally on the completion of Inmaculada, we’ll give a little bit more color in a couple of slides – in the next couple of slides. By the way we are making very important progress. We continue targeting the start of commissioning and ramp-up by the end of 2014 with a ramp-up in early 2015. The project is at 68% completion right now and as you probably know already it’s to be our lowest cash cost operation.
Moving to the next slide, talking about our core assets. We continue seeing consistent production performance. We’re on track to meet our 2014 production target of $21 million ounces with a very solid first half of the year.
We continue being very disciplined with our policy of mining close to average reserve grade, no high grading. The cash optimization program has reduced operating cost by almost $100 million. The main operational scores fell by 16% during the first half of the year and we continue using very conservative cut-off and price assumptions for gold and silver and we have been using them when gold and silver prices were significantly higher.
As you can see how all these factors have helped us in moving from our original 2013 assumptions of $22.3 per ounce to $18.3 estimated for 2014 and $17.1 once Inmaculada gets into full production.
Moving to the next slide we have progress in Inmaculada. As you can see in the last line of the chart, overall progress is at 68%. As you can see all the progress that we’re making -- that we have been making in all the different functions of the project.
Infrastructure and access, we’re at 77%. The electricity transmission line is complete now at 100%. Mine development at 96%. Engineering at 97%. Permitting at 100%. EIS approval 100%. Contracts and procurement also 100%. Plan construction at 33% and this is mostly due to the fact that the contractor commenced the plant construction in April. We have small delays related to poor weather and a slow onsite recruitment.
We’re expecting that to catch up in the second half of the year and we are already seeing that they are pretty much fully staffed with significant progress made in the weekly advance rate.
The mine development has now reached 30 kilometers. As you know, the mine development is a bottle neck and on that front, development for the total project, for the overall project and on that front, we’re already one month ahead of plan. So also very important progress in that front.
In the next couple of slides, I am not going to stop here, but you can see pictures of how the project is developing with different areas being already constructed on the crushing side, on the mill side, on the tank side and as I said continued targeting that completion by the end of this year.
Moving to Slide 15, also we continue building strong portfolio optionality. First of all we see the Brownfield potential at all our current operations, Arcata, Pallancata, San Jose, with very attractive medium term expansion potential at Inmaculada.
With a portfolio of growth opportunities spread across the Americas, and also with some Greenfield activity in 2014, despite current pricing conditions which is focused on our most promising options, which include the Riverside joint venture in Mexico and the Corina and Ibel projects in Peru.
We also continue having our medium term projects as are shown in the right hand side of that slide with first Volcan, which is 100% owned. Was acquired as a future strategic resource, it’s a very large Chilean gold deposit with almost 10 million ounces of gold resources and very importantly for these type of deposits in that part of the world with water rights purchase at the acquisition bank.
Crespo, which is 100% owned, it’s an open pit project in Peru, which is expected to deliver 2.7 million ounces per year once it gets into full production with a construction permit already approved, which is also very positive data here, very, very positive information and with our remaining CapEx of $80 million as it reaches completion.
And finally we have Azuca which is 100% owned by us with several veins already delineated over 100 million ounces of silver resources, significant geological potential in the district and very large land packets. So, all-in-all a very attractive pipeline of projects spread across the Americas.
And moving to the next and final slide summarizing our key messages. First we have the cash optimization program which as I said delivered $270 million in savings complete in our expectations and we are going to continue targeting further savings in the fronts that I just mentioned.
Our financial significant improvement due to steady production, disciplined cost controls, which have lead to encouraging H1 2014 results and also very importantly with our capital commitments fully financed.
Also in Inmaculada with a completion nearing, expecting it to be our lowest cash cost producer and to deliver 50% increase in our total production with significant potential to contribute even more as the project continues developing and finally a very attractive portfolio of growth opportunities to continue with our long-term growth.
So, this basically summarizes our presentation. And with this, I would like to open up for any questions that you may have.
Thank you. (Operator Instructions) We’ll now take our first question from Mr. Roger Bell from JPMorgan.
Roger Bell - JPMorgan
Good afternoon, gentlemen. Thank you very much for the call. Just one question from me actually, you mentioned towards the start of the presentation you saved $50 million in mine development costs.
I was just wondering if that had any impact on sort of months or weeks of available or in the mines and cells, if you can cut that mine development number any further without impacting upon the flexibility of your mines to continue supplying the plants. If you could just comment on that, that’d be great, thanks.
Sure. Thank you, Roger. The cut in mine development comes from two fronts. First, for meters and the other part is from tariffs, okay. The tariffs hopefully we can continue to sustain over time. On the meter part, we discussed some flexibility that allowed us to cut those meters without having any impact on the production and we have already taken advantage of that.
I'll say going forward, we are going to try to maintain these meters and continue having the same availability. So we don’t see opportunities to cut further on meters and we're going to try to sustain the cut that we have already made.
But our goal is obviously to do all that we can to achieve operation guidance and that’s what we are going to continue doing.
Roger Bell - JPMorgan
Okay. Thanks very much.
Thank you. Our next question comes from Daniel Major from UBS. Please go ahead.
Daniel Major - UBS
Just a couple of question from me. Firstly on Inmaculada and I guess a read through to Group CapEx. Can you give us a reminder on what your longer term all-in sustaining cost estimates for Inmaculada is once at full production?
And secondly your Group maintenance CapEx guidance I guess remains unchanged around $130 million. What is estimated Group CapEx -- maintenance CapEx guidance once Inmaculada is fully ramped?
Okay. On the first part, on the sustaining cost for Inmaculada what we are speaking here is about $14 to $15 all-in sustaining cash flow once Inmaculada gets into full production and on the maintenance CapEx Ramón.
The initial maintenance CapEx for Inmaculada is going to be very low basically because most of them mine development or almost of the mine development is going to be completed with the initial CapEx at Inmaculada. So the $292 million fee that we have giving you as initial CapEx for Inmaculada incorporates relatively larger amount of mine development.
So for around the first six years of Inmaculada, the sustaining CapEx is going to relatively low, is going to be in the range between $10 million and $15 million.
Daniel Major - UBS
Okay. So just I'm assuming that that would imply the all-in sustaining cost will be lower during that period in the $14 to $15 you suggested longer term is that correct?
No. I think $14, $15 are related to these first six or seven years of production in Inmaculada. Then we plan on accessing the resources for those we will have to make further developments. So the CapEx should increase but not by a lot because the inferred resources are very close to the existing measure indicator resources.
But after that, after the year 2011, once we started moving towards the more ancillary veins the deposit has, certainly the sustaining CapEx is going to look like much more like Arcata or Pallancata now where we have to develop to get to those veins.
Daniel Major - UBS
Okay. Thanks very much.
(Operator Instructions) We’ll now take a question from [indiscernible] from Santander Bank.
Hi, thank you for the call. I wanted to ask two questions if I may. The first one is right all sustainable cost stood at $17.5 and in Slide 11 you say that Inmaculada full production it could reach $17.1. Does that mean that maybe with this new advice that we giving regarding cost, you might be pushing that number a little bit lower once Inmaculada is at full production?
And the second question would be regarding Argentina after the fall another noises that we are hearing from Argentina, I would like to see your opinion on what you think impacts would be on [cost] (ph) if any at all. Thank you.
Sure. Thank you for your questions. On the all-in sustaining cash cost what you can see there for this year we are targeting $18.3 for the full year. So the first half of the year there are certain things that for timing differences are not captured yet. So the guidance that we are giving for 2014 is $18.3.
We are expecting that within Inmaculada that figure is going to go down to $17.1. So that taking Inmaculada to have an important positive impact in reducing our all-in sustaining cash cost.
Regarding Argentina, what I can tell you is the following. The two most important things for us where it's having an impact in our financial resource in Argentina, which continue being very positive by the way, we’re first of all the high operating cost or higher operating cost compared to our Peru operations and also the fact that we’re restrictions on taking the cash out of the country.
The reality is that what we have seen during this year, is first of all that there has been a very important devaluation that has had a very important impact on -- positive impact on our cost profile and have helped us to have an important reduction in our operating costs and we believe that that is going to continue.
We believe that that is going to continue being higher devaluation and inflation, so hopefully we can continue benefiting from that, and also we have been having no problems whatsoever in taking the money out of the country.
All the money that we have requested to take out of Argentina we have been able to take. So, as I said the two most important or most critical factors, we are seeing very good progress on those.
Going forward, what is going to happen is gong to be very critical. How the situation will hold out and finalizes is going to be important. Depending on that, we’re going to need to see if there are restrictions imposed for taking the money out of the country. As I said, nothing -- we have not seen anything that impact us so far, but we need to see what happens after that.
And I believe that the fact that these, that all this is coming to an end with elections could create probably a year that there is going to be certain uncertainty on that front, but we believe that the resource based on what we are hearing of the elections or regardless of which the final outcome is should be something continuing being very positive for the business environment in the country.
So, all-in-all I would say that with what we’re seeing is having a positive impact and we have also very important expectations of what could happen after the elections.
And long-term, what I can tell you is that Argentina is by far the lowest explored country from all the countries in which we operate and is the one that by far offers the most attractive geological opportunities. It is the one that has the highest potential of showing or presenting untapped deposits that with potential of the more cash deposits that are very attractive to us in the long term.
To give you an example, the San Jose deposit has twice the grade of the deposit that we carry in Peru. So the possibility of finding another deposit, such an effective deposit in Peru is significantly lower, because it has been explored significantly more. So, we’re very enthusiastic about the long-term potential of Argentina as well.
Clarified. Thank you very much for your answers.
Thank you. (Operator Instructions) We’ll take a question from Daniel Major from UBS.
Daniel Major – UBS
Hi, just a quick follow-up. On Crespo, you obviously delayed the development of the project in par response to lower commodity prices, but also in terms of CapEx in Inmaculada, what sort of price level would it be economic to restart the development of this project and will that purely be driven I guess by the balance sheet and by timing of CapEx elsewhere across the Group or how much will it be driven by the prevailing price environment?
Sure, Daniel. We believe that even at these prices we believe that Crespo could be profitable, not extremely profitable, but could generate a profit. But what we do next at Inmaculada is going to depend on the all alternatives that we have.
What I can tell you so far is that the alterative that is looking the best is evaluating the possibility of increasing capacity of Inmaculada. Inmaculada we have already build a plant is a plant that can be very economically expanded and the mine and the additional geological resources that we’re finding there are looking very attractive.
So, we’re still in the process of evaluating that and we’re going to need to wait until Inmaculada gets into operation, but I would say we need to evaluate all the alternatives, but so far increasing capacity in Inmaculada looks like a priority before Crespo and this current event.
Daniel Major – UBS
Thank you. (Operator Instructions) We do not have any question over the phone at this time.
Okay. Thank you very much for your time and if you have any additional questions please feel free to contact Charlie Gordon at our London office. Thank you very much for your time and contribution. Bye.
Thank you. That will conclude today’s conference call. Thank you for you participation ladies and gentlemen. You may now disconnect.
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