Business Overview
Hochschild Mining Plc (LON: HOC) is a mining company with a focus on the premium quality of gold and silver deposits. The company has been operating from the past 50 years across the Americas. The company has operations in the region of Argentina, Chile and Peru. The group currently operates in one underground mine in the southern part of Argentina and three underground mines in the southern part of Peru. The company operates in epithermal vein mines and uses cut and fill mining method, and the extracted ore is processed into dore or gold-silver concentrate. The company is headquartered at Lima, Peru and is having offices in Argentina and London as well. The company’s project portfolio includes an Advanced Project at Inmaculada mine and Growth Projects at Volcan mine, Azuca mine and Crespo mine.

The current Chairman is Eduardo Hochschild and was appointed in the year 2006. Ignacio Bustamante holds the responsibilities of Chief Executive Officer. Ramón Barúa is the current Chief Financial Officer, was appointed on June 2010. Eduardo Landin holds the responsibilities of Chief Operating Officer.

Key Statistics



Top Shareholders

 
Production Update – Q4 2019

On 15th January 2020, Hochschild Mining Plc released a production report for 12 months period ending 31st December 2019. The company has delivered stronger than expected growth in the Q4 of the financial year 2019 and costs for the FY2019 stood in line with the set targets. The company delivered strong production in the financial year 2019. The gold and silver production stood at 269,892 ounces and 16.8 million ounces, respectively for the full-year 2019. The production of gold equivalent stood at 477,400 ounces for FY2019. The production of silver equivalent was at 38.7 million ounces in the financial year 2019 versus 37.0 million ounces in the financial year 2018. At Inmaculada, the company made record production of gold equivalent at 260,126 ounces in FY2019 versus 244,445 ounces in FY2018. The production of silver equivalent at San Jose went up by 10 per cent to 15.4 million ounces in FY2019 versus 14.0 million ounces in FY2018. The company’s costs remain in line with the set forecast of gold equivalent at USD 960 to USD 1,000 per ounce and for silver equivalent between USD 11.8 to USD 12.3 per ounce in the financial year 2019. The company had discovered high-grade resources at its Inmaculada mine. The company had received permission for exploration activities at Cochaloma and Pablo Sur and the drilling is set to start in the first quarter of the financial year 2020.

The cash balance in the financial year 2019 was around USD 166 million versus USD 80 million in FY2018. The company refinanced its existing short-term debt of USD 150 million with a 5-year loan of USD 200 million with LIBOR rate of +1.15 per cent. The net debt declined to USD 34 million in FY2019 from USD 77 million in FY2018, with Net Debt/ LTM EBITDA of around 0.10x for the period.

The company expects its production for gold equivalent to be around 422,000 ounces and silver equivalent at 36.0 million ounces approximately in the FY2020. The company’s costs for a gold equivalent is expected to be in between USD 1,040 to USD 1,080 per ounce and silver equivalent to be in range from USD 12.1 to USD 12.5 per ounce in the financial year 2020. The company’s capital expenditure is expected to be around USD 115 million to USD 130 million in the FY2020. The capital expenditure includes $22 million for expansion activities at Inmaculada mine. The budget for brownfield exploration stood at USD 36 million and additional USD 8 million for greenfield and the advanced project in the financial year 2020.

Financial Highlights – H1 Financial Year 2019 (30th June 2019, US $, million)
 

(Source: Interim Report, Company Website)

In the first half of the financial year 2019, the company’s reported revenue stood at $354,450 thousand.The adjusted operating profit stood at $44,693 thousand in H1 FY2019 versus an adjusted operating profit of $64,628 thousand in the first half of the financial year 2018. The profit for the year before exceptional items stood at $25,085 thousand in H1 FY2019 against $22,242 thousand in H1 FY2018. The total net profit of the year was $16,661 thousand in H1 FY2019 versus $10,718 thousand in H1 FY2018. The total basic and diluted earnings per share stood at US$0.03 in H1 FY2019 versus US$0.03 in H1 FY2018.

Market Drivers for Gold & Silver Market


Source: Company’s Annual Report 2018

In the financial year 2018, the investors bought gold of 13.8million ounces. The demand for gold fabrication globally stood at 97 million ounces for the period and was majorly demanded by the Jewellery sector. The supply of gold, including scrap supply and mine production, increased by 0.2 per cent to 127.4 million ounces in FY2018. Mine production remained the primary source of supply with 72.3 per cent for the period.


Source: Company’s Annual Report 2018

In the financial year 2018, the investors bought silver of 41.3million ounces. The demand for silver fabrication globally stood at 936.9 million ounces for the period and was majorly demanded by the electronics and jewellery & silverware sector. The supply of silver remained flat at 978.1 million ounces in FY2018. Mine production remained the primary source of supply with 79.4 per cent for the period.

Key Performance Indicators


Dividend per Share

DPS (Dividend per share) is the total announced dividends delivered for every share outstanding by the company. Hochschild Mining Plc’s DPS surged by 17 per cent to 3.92 cents in the financial year 2018 from 3.35 cents in FY2017.


Total Silver Cash Costs

In the financial year 2018, driven by the devaluation of the Argentinian peso resulted in lower unit cost at San Jose and Pallancata, which resulted in a decline in total silver cash costs by 6 per cent to USD 8.3 per ounce from USD 8.8 per ounce in the financial year 2017.


Resource Base

In the financial year 2018, the resource base increased by 9 per cent to 1,462 ounces from 1,340 ounces in the financial year 2017. The increase was driven by the discovery of new inferred resources in Inmaculada mine.


Lost Time Injury Frequency Rate (LTIFR)

In the financial year 2018, the company introduced the Hochschild Safety Transformation plan, which resulted in a decline in LTIFR by 35 per cent to 1.74 versus 2.69 in the financial year 2017. The LTIFR of HOC remained low as compared to the industry.


Accident Severity Index

The company under Hochschild Safety Transformation plan released safety software tool, which resulted in a decline of accident severity index to 930 in FY2018  from 1,264 in the financial year 2017.

Financial Ratios
 

(Source: Thomson Reuters)

The reported gross margin in H1 FY2019 surged by 0.5 per cent to 28.7 per cent in the first half of the financial year 2019 versus 28.2 per cent in H1 FY2018and stood lower as compared to the industry median. The reported EBITDA margin of 35.3 per cent for the H1 FY2019 stood higher than the industry median of 30.6 per cent. The reported operating margin in H1 FY2019 was down by 3.8 per cent to 9.2 per cent from 13 per cent reported last year for the same period. The reported Pretax margin of 8.3 per cent for the H1 FY2019 remained lower as compared to the industry median of 9 per cent. Net margin reported was 4.7 per cent for the first half of the financial year 2019, reflecting an increase of 1.8 per cent when comparedwith last year data for the same period. Return on equity for the first half of the Financial year 2019 stood at 1.9 per cent, which was lower than the industry median of 4.1 per cent. On the liquidity front, Hochschild MiningPlc’scurrent ratio was lower than the industry median of 1.67, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Hochschild MiningPlc’swas 0.22x, which was lower as compared to the industry median of 0.57x, reflecting that the company is less leveraged as compared to its peers.

Share Price Performance
 

Daily Chart as of  January 29^th, 2020, before the market close (Source: Thomson Reuters)

Hochschild MiningPlc shares were trading at GBX 164.63 at the time of writing before the market close (at 1:50 PM GMT) on 29^th January 2020 and were down by 0.41% versus the previous day closing price. Stock's 52 weeks High is GBX 232.20 and Low is GBX 150.30. At the time of writing, the share was trading 29.10 per cent lower than the 52w High and 9.53 per cent higher than the 52w low. Stock’s average traded volume for 5 days was 802,341.40; 30 days – 1,137,287.50 and 90 days – 1,080,274.50. The traded volume (average) for 5 days was down by 29.45 per cent versus 30 days average traded volume. The group’s stock is reflecting significantly higher volatility as against the benchmark index based on the company’s beta of 2.14. The outstanding market capitalisation was around £851.13 million, with a dividend yield of 1.91%.

Valuation Methodology

Method 1: Price to Cash Flow Approach (NTM)



To compare Hochschild Mining Plc withits peers, Price/Cash Flow multiple has been used. The peers are Kenmare Resources Plc (NTM Price/Cash Flow was 6.33), Central Asia Metals Plc (NTM Price/Cash Flow was 5.23), Glencore Plc (NTM Price/Cash Flow was 4.64), Anglo American Plc (NTM Price/Cash Flow was 4.59) and Pan African Resources Plc (NTM Price/Cash Flow was 3.55). The Average of Price/Cash Flow (NTM) of the company’s peers was 4.87x (approx.)

Method 2: Price to Earnings Approach (NTM)
 
 

To compare Hochschild Mining Plc withits peers, Price/Earnings multiple has been used. The peers are Fresnillo Plc (NTM Price/Earnings was 25.74), Petra Diamonds Ltd (NTM Price/Earnings was 25.36), Antofagasta Plc (NTM Price/Earnings was 19.75), Hill & Smith Holdings Plc (NTM Price/Earnings was 16.75) and Anglo Pacific Group Plc (NTM Price/Earnings was 7.81). The Average of Price/Earnings (NTM) of the company’s peers was 19.08x approx.).

Growth and Risk Assessments

The company has many value-accretive projects in the pipeline with low risk and higher production. The company is well-positioned to take benefits from growth trends across the energy and industrial markets. The company using its cost synergies, had optimized its operational structure to achieve sustainable growth in the future. The company operates inmultiple geographies, its profits can be impacted negatively due to foreign exchange rate fluctuations. The ongoing trade war between the US and China had impacted the company’s performance.

Conclusion

Despite the weak financial performance recorded in H1 FY2019, the company is expecting a rise in demand for both gold and silver. With the global financial markets started experiencing volatility, the growth prospect of precious metals will improve in the year 2020.

The cash balance in the financial year 2019 was around USD 166 million versus USD 80 million in FY2018. The net debt declined to USD 34 million in FY2019 from USD 77 million in FY2018. The company’s growth strategy revolves around lower costs, optimising projects at earlier stages and strategic partnerships to maximize the shareholders’ value. 

Over the course of 4 years (FY14 - FY18), the company’s revenue surged from USD 493 million in FY14 to USD704.3 million in FY2018. Compounded annual growth rate (CAGR) stood at 9.33 per cent.

Based on decent prospects and support from the valuation as done using the above two methods, we have given a “Speculative Buy” recommendation at the current price of GBX 161.77 (as on 29^th January 2020, before the market close at 9:15 AM GMT) with single-digit upside potential based on 4.87x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.) and 19.08x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.76938 GBP.

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