Hochschild Mining PLC (OTCPK:HCHDF) Q1 2016 Earnings Conference Call April 20, 2016 9:30 AM ET
Ignacio Bustamante - Chief Executive Officer
Ramón Barúa - Chief Financial Officer
Charles Gordon - Head, Investor Relations
Jean-Paul Tsotsos - BMO Capital Markets
Jessica Fung - BMO
Hello and welcome to today's Hochschild Q1 2016 mining production results. [Operator Instructions] I'm now pleased to present our host, Ignacio Bustamante, CEO. Please begin.
Thank you, Mark. Hello, everyone, and welcome to our first quarter production conference call. I am Ignacio Bustamante, CEO; and we also have on the call Ramón Barúa, our CFO; and in London, Charlie Gordon, our Head of Investor Relations.
As usual, I will give you a short summary of the announcement we have made this morning, and then hand the call over for questions.
The first quarter has continued the consistent operational performance we have displayed over the last few periods. And with prices remaining strong and our low-cost Inmaculada mine running very smoothly, we have started the year in a confident frame of mind.
Let me quickly take a look at the operational performance so far in 2016. And what is budgeted as the lowest quarter of the year, production was slightly ahead of our expectations at just over 51,000 ounces of gold and almost 3.7 million ounces of silver, which together makes 7.4 million silver equivalent ounces, a 79% increase on the same period last year.
Our flagship low-cost gold mine Inmaculada enjoyed a solid start to the year, producing around 34,000 ounces of gold and approximately 3.5 million ounces of sliver. The mine has also continued to deliver low costs with the operation firmly on track to deliver all-in sustaining costs of between $9 to $10 for the year.
Our Arcata mine, once again, enjoyed a consistent period, producing 1.7 million silver equivalent ounces, which considering it has been operating at our used capacity following our 2015 mine plan optimization. It's a very pleasing performance and shows a positive effect of our ongoing brownfield exploration program at the deposit.
At Pallancata, as I mentioned earlier this year, we have entered a transitional phase of the Selene plant prepared to switch over to processing a new low-cost Pablo vein at the end of the year. The mine is also operating under an adjusted mine plan to produce only profitable ounces, and in the first quarter contributed a further 840,000 sliver equivalent ounces.
In Argentina, as you know, the environment for our San Jose operation has improved immensely in the last few months, with a significant fiscal and monetary changes that new government has initiated, and we now expect our operation to be an important cash flow generator with much lower costs than in 2015.
The mine itself delivered its customary strong performance with 2.7 million silver equivalent ounces, a highly creditable performance, given the scheduled hourly workers vacation in February. This is exactly in line with the same period last year, and like 2015 the production rate is scheduled to increase as we move through the year.
Turning to the balance sheet. We have seen a strong start to the year in terms of prices, and combined with our solid performance of production, the current net debt to EBITDA ratio show significant progress of approximately 1.8x versus the 2.5x we disclosed for the end of December 2015.
Our stated target for 2015 is between 1x to 2x net debt to EBITDA. So we are well on track after only one quarter. Remember that we have also protected a portion of our cash flow for 2016 with 45% of our production going forward.
Our current cash balance roughly grown to beyond $100 million with our net debt at around $345 million, which is a significant improvement on this time last year and demonstrated a positive cash flow effect of Inmaculada and our other operations.
On the growth front, we are making good progress in our development of the low-cost Pablo vein at Pallancata, which is due to start production towards the end of the year. And in the second quarter, we are scheduled to recommence our brownfield exploration program at Arcata as well.
There remain significant spare plant capacity in Peru, in particular, and we believe that additions to throughput Arcata, Selene, and at idled plant in Ares will generate extreme value uplift for our shareholders. Also in Q2 we will begin a new drilling campaign at highly prospective targets, close to San Jose.
We remain firmly on track to meet our targets for the year of 32 million ounces of silver equivalent production and all-in sustaining cost of between $12 to $12.5 per ounce. It is worth reminding you that [technical difficulty] for production this year is a 14 million or so ounces coming from Inmaculada, which is in line to operate at all-in cost of between $9 to $10 of sliver equivalent ounce.
And with that, I would like to open up for any questions that you may have.
[Operator Instructions] Our first question comes from Jean-Paul Tsotsos of BMO Capital Markets.
I just have a question about your gold and silver hedges. Can you guys provide any color on which ounces were sold into the silver and gold hedges in Q1?
What we do is we hedge primarily our operation in Peru. In Argentina, remember that we have partner, so that is not easier to hedge, so most of the ounces that we have hedged are Peruvian ounces. This is a financial hedge. So it's not necessarily associated with production of any particular mine, but our policy is to hedge around 50% to two-thirds of production for this year for 2016 and nothing for 2017. The prices you have them in the press release and the amounts are evenly split on a monthly basis throughout the year.
But do you guys have any color, for example, you had 6 million ounces of sliver hedged at the start of the year at 15.93. Now are those spread out throughout the whole year or you've used a certain proportion of that already in the first quarter, like how does --
Of course, we have used -- it's evenly split on a monthly basis. So yes, as the year progresses then part of that hedge is being a consumed, if you wish.
So it's just on a monthly basis, it's not changing differentially depending on the prices?
No, it's on a monthly basis.
Our next question comes from Jessica Fung of BMO.
Just a question on Inmaculada, it looks like you guys had a pretty good grades there in the first quarter, do you expect to keep that up for the rest of the year or what does that look like?
What's we're seeing in Inmaculada is a -- the guidance that we gave at the beginning of the year, so to produce around sort of 14 million ounces for the full year. The grades coming better than we anticipated, the reality is that we put the mining planning base for Inmaculada.
Basically you've seen the material coming from the borders, which tend to come at lower grade and has slightly higher dilution. The reality is that the grade that we have been finding during the first quarter of the year have been better and the dilution has also been better, around 5% less than what we had initially budget. And that has resulted in a better overall grades coming to the plant.
Hopefully that trend will continue. But at this point we cannot guarantee that, so we are sticking to our original guidance of around 40 million ounces for the full year.
Our next question comes from [indiscernible].
I've got two questions regarding San Jose and Argentina in general. The first one is how do you feel regarding the lower cost guidance that you've provided, lowering some $13 per ounce to $11.5. Is it on track? And do you think it is achievable? And my second question is still about San Jose, is how much dividend do you expect to distribute to your partner this year, now that the cost has been lowered and that the gold, silver prices have been higher?
For your first question, the answer is yes, we feel very confident with the guidance that we gave for the year, looking at $11.5 all-in sustaining cash flow for the full year. So things are looking very positive there.
On the second question on dividends, what we have done is given the improvement of cash flows coming from Argentina, we have agreed to pay $10 million of dividends to both parties, so it would be around $5 million for McEwen in the first half of the year.
For second half, if prices continue to where we're seeing them right now, actually we're seeing very good prices for silver specifically, the idea is to do two things, note, first to try to repeat the dividend at the beginning of the year, but again that's not guaranteed, and also try to boost the exploration program that we have in Argentina in the past few years.
We have postponed some of the brownfield exploration due to a situation in the country. Now we have lots of targets that are already identified and we are ready to move in, so we are going to be discussing with our partner in the best way to proceed with the cash flows in the second half of the year, but those are the two things that we would like to address.
[Operator Instructions] As there's no further questions at this time, I'll hand back to our speakers.
End of Q&A
Thank you very much, Mark, and thank you very much everybody for participating in the call. And should you have any additional questions, please feel free to contact directly Charlie Gordon at our London office. Thank you very much. Have a good day.
Thank you. This now concludes the conference. Thank you all very much for attending, you may now disconnect.
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