Hochschild Mining PLC (LON: HOC)

Hochschild Mining PLC (LON: HOC) is an FTSE 250 index listed Mining Company which focuses on gold and silver deposits. The Company has been operating over the past 50 years and has operations in the region of Argentina, Chile, and Peru. It currently operates with one underground mine in the southern part of Argentina and three underground mines in the southern part of Peru.

Recent trend of dividend payments

The Company has a progressive dividend policy to pay out to shareholders, and it will pay a final dividend of 2.3 US cents per share on 07 June 2022, while the ex-dividend date was 05 May 2022. Moreover, it has taken the full-year total cash dividend to USD 22.0 million for FY21.

Growth Prospects

• Favourable Gold Price Momentum: The steep fall in the global equities had enhanced the safe-haven appeal of the metal amid worries about the global economic health. Moreover, the rising energy prices may fuel gold demand as it is considered as a hedge against inflation.
• Acquisition & Demerger: HOC had completed the demerger of its Chilean rare earth business, renamed Aclara Resources, in December 2021. Moreover, the Company had announced the acquisition of Amarillo Gold in Brazil to be completed by the first quarter of 2022.

Key Risks 

• Decline in Production Volumes: HOC had faced a significant year-on-year decline in production volumes for Gold and Silver during Q1 FY22.
• Record UK Inflation: The rise in regulated household energy bills led to UK inflation leaping to 9% in April 2022, the highest level since 1982. It may adversely impact UK equities.
• Bank of England Warning: The Bank of England had trimmed its economic growth forecast for 2023 and is expected to show a contraction of 0.25% from a previously estimated growth of 1.25%. Moreover, it had also warned of UK inflation reaching around 10% very soon.

Key Fundamental and Shareholders Statistics of Hochschild Mining PLC. 

Hochschild Beeck (Eduardo) is the most significant shareholder as it holds nearly 196.90 million shares.

Production Highlights (for the quarter ended Q1FY22, as of 26 April 2022)

(Source: Company Website)

• Gold and Silver Sales: The Group reported silver sales of 2,600 koz and gold sales of 49.64 koz in Q1 FY22.
• Liquidity: The company ended Q1 FY22 with net cash of USD 54 million as of 31 March 2022.

FY21 Financial Highlights (for the year ended 31 December 2021, as of 23 February 2022)

(Source: Company Filings)

• Profitability: On the profitability front, the Basic earnings per share (post-exceptional) witnessed an excellent year-on-year jump of around 400% during FY21.
• Balance Sheet: The cash balance stood at USD 386.8 million as of 31 December 2021.
• Operational Strength: The Company had managed to meet FY21 production guidance and delivered strong operational performance despite the impact of Covid protocols in 2021. HOC had achieved production of 362,972 gold equivalent ounces (31.2 million silver equivalent ounces) during FY21. 

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 25 May 2022 at 08:56 AM GMT+1, HOC’s shares were trading at GBX 112.86, up by around 0.32% from the previous day closing price. Stock 52-week High and Low were GBX 199.78 and GBX 67.24, respectively.

On a daily chart, the stock price is sustained above the 20-days exponential moving average of GBX 110.97. Hence, there could be an uptick in the stock price in the near term. Also, the MACD line has given a bullish crossover against the signal line.

Valuation Methodology: Price/Earnings Approach (FY22E) (Illustrative) 

Business Outlook

The Company had demonstrated decent top-line revenue growth and an excellent jump in profitability during FY21. In terms of guidance, HOC expects a total sustaining and development capital expenditure ranging from USD 150 million to USD 160 million for FY22, with a significant amount to be incurred towards Amarillo/Posse gold project. Meanwhile, HOC has achieved a solid first-quarter operational delivery at Inmaculada and recently initiated a new drilling campaign at the Snip project in Canada. Overall, the Company remained confident of meeting production & cost targets during FY22.

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the decent fundamentals, strong operational progress, consistent dividend payments, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Hochschild Mining PLC at the current market price of GBX 112.86 (as of 25 May 2022 at 08:56 AM GMT+1), with lower-double digit upside potential based on 11.23x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.  

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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